American Bar Association
Section of Business Law
Making the World Safe for Banks and Commercial Real Estate Developers
Overview of Lender Liability Under Environmental Laws
Lawrence P. Schnapf
New York, New York
212-756-2205 (phone)
212-593-5955 (fax)
Lawrence.schnapf@Environmental-law.net
Copyright © 2005 Lawrence Schnapf
9253930.2
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I. INTRODUCTION
Environmental issues present three basic types of risks to lenders: Credit Risk, Direct
Liability and Reputational Risk
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Credit Risk- This concern has two components. First, lenders are concerned that
environmental issue may impact the cash flow of the borrower and affect its
ability to repay the loan. The second concern within this risk category is
impairment of collateral value from contamination or other environmental
liability such as asbestos, lead-based paint, mold or lead in drinking water.
Direct Liability- This is the risk that a lender will be held liable for cleanup costs
or toxic torts (i.e., personal injury or property damage claims from hazardous
substances)
Reputational Risk-Lenders do not want to be associated with property that may
be stigmatized or that poses risk to the local community.
The type of bank that is involved in a particular transaction as well as the nature of the
transactions may also influence the level of concern for environmental issues. Factors
that could influence sensitivity to environmental issues include the following:
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Community Bank, Regional or Money Center Bank, or Investment Bank;
Traditional Mortgage Lender, loan syndication or Securitization;
Asset-Based v. balance sheet loan facility;
Loan vs. Equity Investment
Refinance vs. New Loan
According to a survey conducted by Environmental Data Resources Inc (EDR) in 2003,
one out of every ten banks involved in commercial real estate loans have experienced
losses due to environmental issues within the past year. The environmental-related losses
involved two loans per year and the average total loss of $1.2 million. Based on the
number of banks involved in commercial real estate transactions, EDR said the survey
results mean that 900 banks may have experienced losses due to environmental issues
during the past 12 months and that the total value of these defaulted loans could be $1.11
billion.
The EDR survey found that the smallest banks had the highest incidence of
environmentally-related losses. Lenders with assets less than $1 billion (mainly
community and smaller regional banks) experienced almost 75% of loan losses due to
contamination. For example, 43% of all lenders having less than $250 million in assets
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reported that they suffered losses from environmental issues. The total loss experienced
by this asset category was $473 million. In contrast, 29% of banks with assets between
$250 million and $1 billion experienced a total of $319 million in loan defaults because
of environmental issues. Banks in the $1 billion to $10 billion asset category represented
28% of the respondents and experienced the lowest total loss at $308 million.
EDR concluded that the reason the smaller banks suffered disproportionate
environmental-related losses was because they tend to perform less comprehensive
environmental due diligence and also because smaller borrowers had a greater tendency
to walk away from contaminated sites since the cleanup costs often exceed the amount of
the equity invested in the property. The smaller banks typically do not have in-house
environmental expertise, have not developed environmental risk management policies,
have not established minimum due diligence requirements, and often simply accept phase
I environmental site assessments (ESAs) performed by consultants who have been
retained by the borrower and whom the banks have not pre-qualified.
EDR also indicated that the survey confirmed that the majority of banks perform
environmental due diligence to manage risk and not because of concerns over
liability. As a result, many lenders have developed their own environmental due
diligence protocols that often exceed the ASTM E1527-00 standard for Phase I ESAs.
These so-called ASTM-Plus protocols often require consultants to examine issues not
addressed by the ASTM E1527-00 standard such as asbestos, lead-based paint, lead in
drinking water, radon and mold.
This article will review the scope of liability that lenders may face under federal and state
environmental laws.
II. OVERVIEW OF LENDER LIABILITY UNDER CERCLA AND RCRA
The two environmental laws of greatest concern to lenders are the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA")1 and the federal
Resource Conservation and Recovery Act ("RCRA:").2 These laws do contain secured
creditor exemptions that provide a safe harbor to lenders from liability for the cleanup of
contaminated property. The exemptions can provide liability protection to secured
creditors during the administration of a loan (including workouts) as well as during
foreclosure and post-foreclosure.
It should be noted that the CERCLA and RCRA secured creditor exemptions do not
provide liability relief for other federal laws such as for the cleanup of polychlorinated
biphenyls ("PCBs") or for complying with the lead-based (“LBP”) disclosure rules
promulgated under the Toxic Substance Control Act.3 Similarly, the CERCLA and
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RCRA secured creditor exemptions do not provide any liability relief for state or
common law claims.
A. CERCLA
This law imposes strict and joint liability on four classes of potentially responsible parties
(“PRPs”) for the cleanup and reimbursement of costs associated with releases of
hazardous substances. The four classes of PRPs include:
 past and current owners of facilities and vessels (i.e., tanks, equipment, etc.);
 past and current operators of facilities and vessels;
 generators of hazardous substances; and
 transporters of hazardous substances.4
The federal government is authorized to perform cleanups known as response actions
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and then may seek to recover its costs against PRPs. 6 The federal government may also
seek injunctive relief ordering PRPs to perform response actions for releases of hazardous
substances that pose "imminent and substantial endangerment" to human health or the
environment.7 Private parties and states that incur response costs may also seek to recover
those costs either in cost recovery actions8 or contribution actions.
There are three affirmative defenses to CERCLA liability:
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Act of War;
Act of God; and
The Third Party Defense.9
The most commonly asserted defense is the third party defense. To qualify for this
defense, a defendant must establish the following four elements:
 The release was caused solely by the act or omission of a third party;
 Whom the defendant had no direct or indirect contractual relationship;
 That the defendant exercised due care with respect to the hazardous substances
due care (“due care element”), and;
 Took precautions against the foreseeable acts or omissions of any such third
parties (“precautionary element”).10
Because a lease or purchaser agreement could be considered a "contractual relationship",
the third party defense was largely unavailable to purchasers or tenants of contaminated
property. As a result, Congress enacted the innocent purchaser defense in 1986. Under
this defense, a purchaser who "did not know or had no reason to know" of contamination
would not be liable as a CERCLA owner or operator. 11To establish that it did not know
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or have reason to know of the contamination, the party must have conducted an
"appropriate inquiry" into the past ownership and uses of the property.12
Many courts have narrowly construed the innocent purchaser's defense. In most cases, if
a purchaser did not discover contamination prior to taking title but contamination is
subsequently discovered, the court will conclude that the purchaser did not conduct an
adequate inquiry and, therefore, not be eligible for the defense.
Note: Because the innocent purchaser defense is technically a part of the third party
defense, a landowner would have to satisfy the due care and precautionary elements of
the third party defense as well.
In 2002, Congress added a Bona Fide Prospective Purchaser Defense ("BFP") and
Contiguous Property Owner (“CPO”) defense13 to CERCLA as part of comprehensive
amendments to the law that became effective on January 11, 2002.14 Under the BFP, a
purchaser may knowingly acquire contaminated property and not be liable for
remediation if it satisfies nine conditions.15
The CERCLA secured creditor exemption was originally enacted out of a concern that
persons who held mortgages for security of loans or other obligations in so-called "titletheory" states would be treated as CERCLA owners or operators while a mortgage is in
effect. In those states where the common law of mortgages applies, a mortgagee actually
holds title to the property. 16 The legislative history did not provide any guidance on the
types of permissible activities that would be considered to be consistent with the
exemption.
The secured creditor exemptions received little attention until the late 1980s when a
series of conflicting decisions created much uncertainty in the financial community on
the scope of their protection and what actions they could take without losing their
immunity to liability. This uncertainty took on particular importance for the Federal
Deposit Insurance Corporation ("FDIC") and the Resolution Trust Corporation ("RTC")
that were acting as conservators and receivers of failed insured depository institutions
under the Federal Institutions Reform, Recovery and Enforcement Act ("FIRREA").17
The FDIC and RTC became concerned that when they were appointed as receivers or
conservators of insolvent financial institutions, they could take title or have security
interest in contaminated properties that were in the portfolios of those failed lenders. The
exemption also posed a risk to other governmental agencies such as the Small Business
Administration who could acquire interests or possession of a diverse range of
businesses, properties and assets that might contain contaminated properties.18
As a result, EPA promulgated a CERCLA Lender Liability Rule in 1992.19 After the rule
was invalidated, Congress enacted the Asset Conservation, Lender Liability and Deposit
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Insurance Protection Act ("1996 Lender Liability Amendments") that substantially
amended the secured creditor exemptions of CERCLA and RCRA.20 The 1996 Lender
Liability Amendments added new defined terms and identified the kinds of actions
lenders could take without being considered to be participating in the management of a
facility as well as the steps that lenders had to follow to foreclose on property and still be
considered simply protecting their security interest. Congress made it clear that the 1996
Lender Liability Amendments did not create any liability but instead merely limited
liability that might otherwise be present.21
The CERCLA secured creditor’s exclusion operates to exclude from the definition of
“owner or operator” any person who “ holds indicia of ownership primarily to protect the
security interest” in a vessel or facility will not be liable as an owner or operator if that
person does not “participate in the management” of the facility or vessel.22 This
exemption can insulate a secured creditor from liability during the administration of a
loan including workouts so long as the lender's actions during the life of a loan do not
constitute exercising managerial control over the operations of its borrower.
The exemption also provides limited protection to lenders during foreclosure. 23 However,
this memorandum will focus on the pre-foreclosure activities that are permissible under
the secured creditor exemption and not discuss what a lender has to do to comply with the
foreclosure requirements of the secured creditor exemption.
B. RCRA
RCRA regulates the generation, storage, handling, transportation and disposal of
hazardous waste. Owners or operators of facilities that treat, store or dispose of
hazardous wastes ("TSDF") must comply with certain operating standards and may also
be required to undertake corrective action to cleanup contamination caused by hazardous
or solid wastes. The corrective action requirements may be contained in a permit.24 The
federal government may also issue a corrective action order to an owner or operator of a
TSDF or generators of hazardous waste to subject to RCRA.25 The government may also
issue orders for injunctive relief to address hazardous wastes posing an "imminent and
substantial endangerment" to public health and the environment.26 Private parties may
also seek injunctive relief to compel persons who contributed to the past or present
handling, storage, treatment, transportation or disposal of hazardous waste that is posing
or "imminent and substantial endangerment" to public health and the environment.27
However, unlike CERCLA, private parties are not entitled to recover their cleanup costs.
The RCRA secured creditor’s exemption is similar to the CERCLA provision but it is
limited to underground storage tanks (“USTs”). In 1995, EPA issued guidance
interpreting the scope of the RCRA secured creditor exemption.
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As amended by the 1996 Lender Liability Amendments, the RCRA secured creditor’s
exemption provides that a lender who has indicia of ownership in a UST system (i.e., one
or more USTs) or property containing a UST system will not be liable as an owner or
operator of the UST system if:
 The indicia of ownership is held primarily to protect a security interest;
 The lender does not participate in the management of the UST system, and;
 The lender is not engaged in petroleum production, refining or marketing.28
The RCRA secured creditor exemption specifically incorporates the definitions and other
requirements contain in the CERCLA secured creditor exemption establishing when a
lender will not be considered an owner or operator of a facility except that to the extent
they only apply to a lender's potential liability as an owner or operator of an underground
storage tank. The RCRA secured creditor exemption will not insulate a lender from
liability as an owner or operator of a RCRA TSDF or at a generator-only facility.29
In addition, the RCRA secured creditor exemption provides that to the extent it is
inconsistent with any provisions of the RCRA UST Lender Liability Rule, the provisions
of that rule will prevail.30
The RCRA secured creditor exemptions do not insulate lenders from liability under other
provisions of RCRA such as the citizen suit provision of section 7002. This section
allows suits to be brought against any person who has contributed to the past or present
handling, storage, treatment, transportation, or disposal of any solid or hazardous waste
which may present an imminent and substantial endangerment to health or the
environment. Courts have broadly interpreted the phrase “contributed to”. In Citizens
Bank and Trust Company vs. MidSouth Rail Corp31, a state court in Mississippi relied on
similar language appearing in the Mississippi superfund law to hold a bank liable for
contributing to environmental conditions at its borrower’s facility. The court said by
extending financing to a company that the lender knew was mishandling hazardous
materials on its property, the bank had contributed to the creation of the problem.
C. Key Definitions of the CERCLA/RCRA Secured Creditor Exemptions
Before analyzing the scope of the secured creditor exemption, it is important to review
some of the key definitions. These terms apply to both the RCRA and CERCLA secured
creditor exemptions.
1. Lender- The secured creditor exemption applies to a broad range of traditional lending
institutions32 as well as any person who:
 Makes a bona fide extension of credit to or takes a security interest from a person
not affiliated with the lender;
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Insures or guarantees against a default in the repayment of an extension of credit
or who acts as a surety for an extension of credit to a person not affiliated with the
lender; or
Provides title insurance and acquires a vessel or facility as a result of an
assignment or conveyance in the course of underwriting claims and claim
settlements.33
2. Indicia of Ownership- The legislative history indicated that the purpose of the
exemption was to protect lien holders in states where mortgages were considered to have
title in the property subject to the security interest. However, in its CERCLA Lender
Liability Rule, EPA defined this term more broadly so that it would apply to all lenders
regardless if they were located in a "title-theory" or "lien-theory" jurisdiction. Under the
EPA definition, it was not necessary for a person to actually hold title in order to
maintain "indicia of ownership. Instead, the term was defined as evidence of a security
interest or evidence of an interest in real or personal property securing a loan or other
obligation including equitable or legal title in real or personal property acquired
incidental to foreclosure or its equivalents. Examples of indicia of ownership set forth in
the regulation included mortgages, deeds of trusts, surety bonds, guarantees of
obligations, title held pursuant to a lease financing transaction, assignments, pledges and
other forms of encumbrances against property that are held primarily to protect a security
interest.34
The 1996 Lender Liability Amendments did not contain a definition of indicia of
ownership. While this term remains undefined in CERCLA and RCRA, EPA has
reinstated its CERCLA Lender Liability Rule as an enforcement policy. Thus, for
purposes of federal enforcement, the EPA definition would apply. Presumably, a court in
a private contribution or cost recovery action might find the EPA interpretation of this
term persuasive though EPA's definition would not be binding on a court.
3. Security Interest- This term includes a right under a mortgage, deeds of trust,
assignment, judgment lien, pledge, security agreement factoring agreements, or lease and
any other right accruing to a person to secure the repayment of money, performance of a
duty, or any other obligations by a non-affiliated person. 35
4. Participation in Management- A lender holding indicia of ownership primarily to
protect a security interest in a facility or vessel will not be liable as a CERCLA owner or
operator during the term of a loan if it does not participate in the management of that
facility. In its CERCLA Lender Liability Rule, EPA concluded that a lender must
exercise actual daily control over the operational affairs of a vessel or facility to be
deemed to have participated in the management of its borrower.36 EPA indicated that the
term does not refer to a lender who merely has the capacity to influence the operations of
a borrower's facility or vessel or unexercised right to control vessel or facility
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operations.37 Thus, the mere presence of clauses in a financing agreement giving a lender
the right to take certain actions such as responding to violations of law or releases of
hazardous substances will not expose the lender to liability.38 The 1996 Lender Liability
Amendments adopted this interpretation.39
A lender who holds “indicia of ownership primarily to protect a security interest” may be
considered to participate in management if it does the following while the borrower is in
possession of the property encumbered by the security interest:
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Exercises decision-making control over the borrower’s environmental
compliance, such that the holder has undertaken responsibility for the borrower’s
hazardous substance handling or disposal practices; or
Exercises control at a level comparable to that of a manager of the facility or
vessel so that the lender has assumed or manifested responsibility for the overall
management of the day-to-day decision-making at the facility with respect to
environmental compliance, or overall or substantially all of the operational
aspects functions of the facility or vessel. 40
The 1996 Lender Liability Amendments added a list of nine permissible activities
commonly taken by lenders that are considered consistent with the exemption and
therefore do not constituent "participation in management". A lender may take the
following nine actions and not be deemed to have participated in management:
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Holding, releasing or abandoning a security interest;
Including environmental compliance covenants, warranties or other
environmental conditions in an security agreement or extension of credit41;
Monitoring or enforcing any terms or conditions of a security agreement or
extension of credit;
Monitoring or undertaking any inspections of the collateral;
Requiring the borrower to take response actions to address releases of hazardous
substances;
Providing financial or other advice or counseling to mitigate, prevent or cure
default or diminution of the value of the collateral;
Restructuring, renegotiating or otherwise agreeing to altering terms and
conditions of a security agreement or extension of credit,
Exercising forbearance of any rights;
Exercising any remedies that may be available under applicable law for breaches
of security agreements or extensions of credit; and
Conducting a response action under CERCLA in accordance with the National
Contingency Plan or under the direction of an on-scene coordinator.42
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Although CERCLA contains provides criteria for determining if a lender's actions are
consistent with the exemption, courts will still have to apply the criteria to the particular
facts of a case.
In Z & Z Leasing Inc. v. Graying Reel, Inc.43 the owner of a contaminated site brought a
contribution action against a bank that held a mortgage on the property. The plaintiff had
obtained bond financing to build a new facility and obtained a letter of credit from a
predecessor of Comerica Bank. The plaintiff executed a Reimbursement Agreement for
any amounts paid under the letter of credit and granted security interests on its assets as
well as a mortgage. Six years later, an environmental consultant retained by the bank
discovered contamination associated with USTs and the borrower then defaulted on its
bond payment. After the bank filed a civil action to seek a judgment on the funds it paid
under the letter of credit, the borrower entered into a settlement agreement where it
agreed to maintain the property and comply with environmental laws. The bank also
provided it with a loan to remove the USTs. The machinery and equipment of the
borrower were sold and the bank extended the payment period for the remaining balance.
The borrower failed to make any payments and filed a contribution action against the
bank, the former owner and a malpractice action against its law firm. The borrower
argued the bank was liable as an owner and an operator because it had effectively
transferred financial management of its operation to the bank when it executed the
Reimbursement Agreement. The agreement contained a number of negative covenants
prohibiting the borrower from amending operative documents, merging or selling assets,
incur indebtedness, guarantying obligations, purchasing assets or stocks, creating or
incurring liens, making loans, purchasing or leasing fixed assets, purchasing or acquiring
its capital stock, declaring or paying dividends, purchasing securities or making
investments without approval of the bank. The district court granted summary judgment
to the bank on all counts. It said that the bank was not liable as an owner because a
mortgagee does not have title to property in Michigan and that the negative covenants did
not amount to participation of management. The court said banks frequently have routine
involvement in the financial affairs of their borrowers to ensure that their security
interests are adequately protected and to impose liability on the bank would punish it for
engaging in the normal course of business. The court said a secured creditor must be
permitted to monitor any aspect of its borrower's business relating to the protection of its
security interest without incurring liability.44
Similarly, in U.S. v. Wallace,45 the operator of a waste treatment and disposal facility
challenged a consent decree proposed by the federal government resolving the liability of
other PRPs at the site. The defendant claimed that the SBA should not be allowed to enter
into the settlement because it had participated in the financial management of the site to a
degree suggesting that it had actual or potential ability to influence or control hazardous
waste disposal decisions. The defendant argued that because the SBA had hired financial
and technical consultants, had authority to limit capital expenditures on new waste
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treatment equipment, could limit certain employee raises and bonuses, had to approve
dividends to shareholders and had authority to control voting shares of stock was
evidence that it had participated in management of the facility. However, the court said
that reservation of certain rights to protect its investment, monitoring any aspects of a
debtor's business, and involvement in occasional and discrete financial decisions relating
to the protection of its security interest did not rise to the level of participating in
management. Accordingly, the court approved the settlement resolving the alleged
liability of the SBA.
In a 2004 case, a federal district court found that a bank might be liable under CERCLA
and RCRA because of its involvement in a borrower’s operations following a default. In
XDP, Inc. v. Watumull Properties Corp,46 Hong Kong & Shanghai Banking Corporation
(Hong Kong) financed the acquisition of manufacturing business in October 1986. The
loan was secured by a mortgage and liens on equipment and fixtures. After the borrower
had defaulted, Hong Kong entered into an asset purchase agreement in May 1989 n lieu
of foreclosure where the bank took title to the property in an “as is” condition and
assumed certain liabilities. Hong Kong then transferred the assets to a newly created
subsidiary, MPI, to operate the business. In May 1991, MPI sold the property to another
Hong Kong subsidiary, XDP. The bank also created a third subsidiary, Tayside, as the
parent of XDP. After contamination was discovered, XDP filed contribution claims
against various predecessors who filed cross-claims against Hong Kong as an operator or
successor of the responsible parties. The parties asserted that Hong Kong’s corporate veil
should be pierced because had inadequately capitalized its subsidiaries, not adhered to
corporate formalities and had commingled accounts and properties of its subsidiaries.
Hong Kong asserted that it was entitled to the secured creditor exemption because it
never participated in the management of MPI, and that XDP made commercially
reasonable efforts to sell the property. However, based on the totality of facts, the court
concluded that there was a question of fact as to whether Hong Kong was merely
protecting its security interest or if it was controlling and managing the facility from 1989
to 1995 when the property was sold to the general manager and CEO of MPI. The court
said there was sufficient evidence for a reasonable finder of fact to conclude that the bank
formed the subsidiaries as sham corporations to evade liability. The court pointed out that
the sole director, president and secretary of XDP was the manager of Hong Kong’s
Portland office, was the only employee of XDP, his salary was paid by Hong Kong and
he did not receive any compensation for serving in official XDP capacities. The court
also found that XDP did not have its own office, relied on Hong Kong’s accountants in
the Portland office to maintain its records. In 1991, XDP’s net interest income as a
negative $22 and it operating income was $58. Likewise, Tayside was found to have no
business purpose except to serve as a holding company for XDP. In addition, Tayside
sent and received faxes from Hong Kong’s Nassau office and the bank’s legal counsel
prepared documents for Tayside even though the company was not his client. The court
also found that Tayside received and owed more than $1 million in loans to Hong Kong
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and that the loans were listed as assets on Tayside’s records. The court also noted that
MPI allegedly sold the property to XDP because Hong Kong was considering selling the
assets of MPI and wanted to isolate the environmental liabilities in XDP. The court also
found that there were material issues of fact as to whether Hong Kong could be liable as a
successor. The court observed that after the acquisition, MPI continued to use the same
facility, substantially the same workforce, machinery, equipment, methods of production,
name, logo, and product as well as the same customer base. The court also found that
because Hong Kong might also be liable as a successor because it had agreed to assume
all liabilities and obligations related to the XDP property.
5. Financial or Administrative Functions- A lender may engage in financial and
administrative actions during the life of a loan without being deemed to be an owner or
operator under CERCLA. Examples of financial or administrative functions set forth in
the secured creditor exemption include actions performed by a credit manager, accounts
payable officer, accounts receivable officer, personnel manager, comptroller, or a chief
financial office. 47
6. Primarily To Protect the Security Interest- This term was undefined in the original
versions of RCRA and CERCLA. EPA did provide its own interpretation of that phrase
when it proposed the CERCLA Lender Liability Rule in 1991. The agency said the
primary purpose of the security interest must be to secure repayment of money, the
performance of a duty or some other obligation and does not include interests in the
nature of an investment in the facility or an ownership interest held for any other reasons
other than to protect a security interest.48 Nevertheless, EPA did recognize that lending
institutions have revenue interests in their loans so the mere fact that a secured creditor
derives some profit or income from the transaction will not cause the lender to forfeit its
immunity so long as the security interest is primarily to secure repayment of a loan or
performance of some obligation. 49 The agency said the protection of a security interest
does not necessarily have to be the sole reason for the transaction. When a person holds
indicia of ownership in a facility primarily for investments purposes as opposed for
assuring repayment of a loan or as security for some other obligation, EPA said the
exemption would not apply.50
The CERCLA Lender Liability Rule promulgated in 1992 indicated that the lender's
motivation was irrelevant for purposes of determining whether it "participated in the
management of a facility" but was relevant in determining why the lender held its indicia
of ownership.51 EPA went on to say that the fact that a lender has a secondary reason for
holding the security interest (e.g., investment purpose) would not void the exemption.52
Thus, a secured creditor can still generate profits such as interest and fees without
forfeiting its immunity from liability so long as the lenders primary purpose was to
protect its security interest.
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The 1996 Lender Liability Amendments did not contain a definition of primarily to
protect a security interest. Again, while this term remains undefined in CERCLA and
RCRA, EPA has reinstated its CERCLA Lender Liability Rule as an enforcement policy.
Thus, for purposes of federal enforcement, the EPA definition would apply. Presumably,
a court in a private contribution or cost recovery action might find the EPA interpretation
of this term persuasive though EPA's definition would not be binding on a court.
E. FORECLOSUREThe 1996 Lender Liability Amendments added a new section 42 U.S.C. 9607(20)(E) that
addresses foreclosure. Like the CERCLA Lender Liability Rule, the new subsection
allows financial institutions to foreclose, re-lease (in the case of a sale/leaseback
transaction) or sell its collateral so long as the lender attempts to divest itself of the
facility or vessel “at the earliest practicable, commercially reasonable time, on
commercially reasonable terms, taking into account market conditions and legal and
regulatory requirements.”
This provision does not contain the “bright-line test” that was contained in the CERCLA
Lender Liability Rule. That test required lenders to list the property within a certain
period of time and to accept offers for “fair consideration.” Lenders who met the test
were automatically deemed to have acquired indicia of ownership primarily for the
purpose of protecting their security interest and therefore would fall within the
protections of the exemption.
In the absence of such a bright-line test, lenders will not be able to know for certain if
their actions are consistent with the exemption and may find themselves subject to
scrutiny by individual courts to determine if they acted “at the earliest practicable,
commercially reasonable time, on commercially reasonable terms.” Many lenders have
established real estate divestiture policies to govern the foreclosure and sale of collateral.
It is possible that a lender might be able to point to compliance with its internal policies
as evidence that it acted “at the earliest practicable, commercially reasonable time, on
commercially reasonable terms.” Because of the uncertainty over what constitutes “the
earliest practicable, commercially reasonable time, on commercially reasonable terms,”
the real estate divestiture groups of financial institutions should work closely with
environmental counsel to make sure that the lending institution does not inadvertently
lose its immunity.
F. POST-FORECLOSURE
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The 1996 Lender Liability Amendments provide that a lender may maintain business
operations, wind down operations, take measures to preserve, protect and prepare the
vessel or facility for sale or disposition, and even undertake response actions under
section 107(d)(l) of CERCLA or under the direction of an OSC so long as the lender
seeks to sell or re-lease (in the case of a sale/leaseback transaction) and complies with the
foreclosure requirements set forth above.53
Lenders have encountered their greatest risk of liability when in post-foreclosure
activities. Financial institutions should exercise extreme caution when conducting
auctions and should consult with environmental counsel prior to conducting any auction
at a manufacturing facility.
Aside from the Fleet Factors case, there are a number of unreported situations where
lenders have been issued administrative orders by governmental agencies and have had to
pay to perform a cleanup because of the actions they took following foreclosure. These
situations have typically taken place when a borrower has gone out of business and the
bank takes control of the facility in order to sell off the inventory, fixtures, machinery and
equipment of the borrower subject to the bank’s lien. The bank typically does not take
title to the property because of fear that it will lose its exemption, but instead hires an
auction to conduct the sale of the personal property. Usually, there are barrels or drums of
hazardous waste strewn about the facility and the equipment that is being auctioned off
may even contain hazardous wastes. To avoid any suggestion that the bank or the auction
had any control over hazardous wastes, the auction will often rope off the area where the
drums or barrels are found. In some cases, the bidders are actually allowed to cherry-pick
barrels containing useful raw materials. After the auction is conducted, the drums and
barrels are then left in the abandoned facility. At some point, government authorities find
out that there are abandoned drums at the facility and order the lender to pay for the
removal of the materials.
Lenders have often argued that the drums containing the wastes were not part of its
collateral, that they have simply relinquished possession of unsold inventory back to their
borrowers, or that they never exercised control over the drums because neither it nor its
auctioneer ever touched or moved them. However, the definition of “release” under
CERCLA includes abandonment of drums. Thus, a lender who has taken control of a
facility to conduct an auction and leaves behind drums or equipment containing
hazardous wastes could be deemed to have caused a threatened release of hazardous
substances. EPA has consistently taken the position that such action constitutes
abandonment of hazardous wastes when the borrower is insolvent and creates generator
liability for the lender.
If the lender decides to have the hazardous wastes removed, it should try to have a
representative of the borrower execute the waste manifests so that the bank would not be
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considered the generator of the waste. However, if a representative is not available, the
bank or one of its agents would have to execute the waste manifests. Since the bank
would be considered a generator of the waste under these circumstances, the lender
should select a reputable disposal or treatment facility.
As a result, financial institutions should consult with environmental counsel prior to
taking possession of a former borrower’s facility or conducting any auction at a
manufacturing facility. It would be advisable for lenders to retain an environmental
consultant or environmental attorney to inspect the facility prior to taking control in order
to evaluate the possible environmental liabilities that might be associated with the
auction. The financial institution could have its environmental consultant or attorney
perform a regulatory review of the facility to minimize the possibility that the lender
could incur liability for releases of hazardous substances at that treatment or disposal
facility. The lender may also want to have an environmental consultant present at the
auction to make sure that hazardous materials remaining at the property are not disturbed
or spilled. If any materials are inadvertently spilled, the consultant could take immediate
steps to contain and cleanup the spill and document those actions.
In addition, the lender should have its counsel review both the lease and the state UST
registrations to determine who is responsible for USTs that may be present on the
property. If the USTs are registered in the name of the borrower, the lender should
discuss the status of the USTs with the landlord. If the landlord believes that the USTs
enhance the marketability of the site, the lender may be in a good position to negotiate a
satisfactory resolution to the UST issue prior to assuming control of the site for the
purpose of conducting an auction of the former borrower’s assets.
Another practice that can expose a lender to liability is the hiring of guards. Lenders
frequently hire a guard to protect inventory or equipment until an auction can be
conducted. The guard often is posted at the entrance to the plant and will not allow access
to the property without approval of the lender. There have been occasions when the
lender’s guard denied access to a local government inspector who wanted to confirm that
the abandonment of the facility did not pose a risk of danger or explosion. By exercising
such control over a facility, a lender could be deemed to be an operator of the facility and
be held responsible for remediating environmental problems at the site. To minimize this
possibility, a lender should have its guard posted in or outside the building where the
collateral is located instead of at the gate leading to the entire facility.
The 1999 NationsBank Settlement
An example of the exposure that a bank may incur during workouts and foreclosure was
the August 1999 enforcement action involving NationsBank where the bank agreed to pay
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EPA $300,000 to settle a cost recovery action that had been filed in connection with
actions that NationsBank had taken during the liquidation of a borrower’s assets
In the spring of 1989, NationsBank extended a $4.75 million loan facility to Clearwater
Finishing Inc. (the “Company”) secured by a mortgage on the property and liens on the
personal property of the Company. Within a year, the Company was in a workout and the
bank held weekly meetings with the Company while also providing guidance to help the
Company maximize its collections, shipping of goods and collection of accounts.
These efforts proved fruitless and in the summer of 1990, the Company filed a Chapter 11
reorganization. When the plant closed for the July 4th holiday, the Bank refused to
release funds from the revolving account to pay the employee wages. Unable to pay its
employees and facing bomb threats from the angry workers, the Company and the Bank
reached an agreement whereby the Bank would pay half of the workers’ salaries if the
Company sought financing from another bank or allowed the Bank to liquidate its
collateral located at the facility. The Company then hired a management company to
wind up its operations. The firm hired a skeleton staff to complete operations, run utilities
and secure the facility. The Bank agreed to pay the salaries of these employees out of the
proceeds of account collections and liquidation of the collateral. The management firm
made weekly report to the Bank. After operations were permanently discontinued, a small
staff of workers was retained to maintain utilities and security to protect the collateral
remaining on the property. The Bank continued to pay these workers salaries, approved
the collection and settlement of all accounts, authorized transfer of any materials and
received daily reports.
In December 1990, the bankruptcy court approved the bank’s motion for relief from the
automatic stay for the purpose of liquidating the remaining assets, including
“perishable” chemicals that were to be sold “as soon as possible.” The Bank then hired
a liquidation company to conduct the sale of the collateral. By the spring of 1991, only
28% of the value of the assets had been sold. The President of the Company then made
arrangements to sell the remaining chemicals and dyes to another company under his
control for the purpose of reprocessing and selling the chemicals to third parties. After
the President and employees had loaded the chemicals onto a truck, the Bank refused to
authorize the sale and insisted that the chemicals be placed back into the facility.
In the fall of 1991, the liquidation company advised the Bank that the remaining
chemicals and dyes no longer had any value. The Bank informed the President of the
company that it would no longer provide heat, maintenance or security for the facility.
The chemicals remained at the property during the next two years. During the winter, the
chemicals froze which caused some drums to burst. Other drums gradually deteriorated
and released their contents within the facility. The President sued the Bank for allowing
the collateral to waste in 1992. The parties reached a settlement in 1993 in which the
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Bank agreed to complete liquidation of the assets in exchange for releasing the President
from personal liability under his guarantee.
During the process of removing equipment from the facility, the liquidation company
caused asbestos and chemicals to be released. In addition, the liquidation company
created holes in the plant that exposed many drums to inclement weather and caused
further releases of hazardous wastes. EPA then conducted an emergency response action
and incurred $1.2 million to remove 2700 drums containing spent dyes and other
chemicals, 27 aboveground storage tanks holding acids, solvents and caustics, an
underground storage tank, smaller containers and asbestos. The agency then brought a
cost recovery action against the Bank alleging that it was an operator of the facility. The
Bank claimed that it fell within the secured creditor’s exemption but EPA claimed the
Bank was not eligible for the exemption because the Bank’ had allowed perishable
chemicals to become hazardous wastes and therefore had not acted in a commercially
reasonable manner. The agency relied on UCC article 2 case law to determine what
actions were deemed to be “commercially reasonable” and constituted “ wasting” of
collateral.
This case once again illustrates the dangers that banks face when they try to sell collateral
after a borrower has defaulted on a loan. Lenders also need to exercise extreme caution
and perform detailed site inspections when foreclosing on assets of a defaulted borrower
even when a bank does not take title to property because the mere act of possessing or
exercising control over inventory at a borrower’s facility can expose a lender to possible
liability as an operator.
G. LIABILITY OF FIDUCIARIES
One of the major drawbacks of the CERCLA Lender Liability Rule was that it did not
apply to financial institutions acting in a fiduciary capacity. The Lender Liability
Amendments filled this void by adding a new subsection to section 107 of CERCLA
which clarified the scope and standard of liability for fiduciaries. The new subsection
107(n) applies to anyone persons holding title, having control or otherwise having an
interest in a facility or vessel pursuant to the exercise of its responsibilities as a fiduciary.
Persons covered by this new subsection include the following:
 trustees;
 receivers;
 executors;
 administrators;
 custodians;
 guardians of estates or a guardian ad litem;
 conservators;
 committee of estates of incapacitated persons;
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


personal representatives;
a trustee under an indenture agreement, trust agreement, lease or similar financing
agreement for debt securities, certificates of participation in debt securities, or
other forms of indebtedness where the trustee is not the lender; or
a representative that EPA determines is acting in one of the foregoing capacities.
However, a fiduciary does not include a person acting as a fiduciary for an estate
organized for the primary purpose of, engaged in, or actively carrying on a trade or
business for profit, or a person that acquires ownership or control of a vessel or facility
with the objective of avoiding liability.
Section 107(n) does not apply to persons who are both fiduciaries and beneficiaries of the
same fiduciary estate and who receive benefits that exceed the customary or reasonable
compensation and incidental benefits. In addition, it does not apply to the assets of the
estate or trust, nor to a non-employee agent or independent contractor of the fiduciary.
The new subsection 107(n) provides that a fiduciary shall only be liable for releases or
threatened releases of hazardous substances from a facility or vessel held in a fiduciary
capacity up to the value of the assets held in the trust or estate so long as the release or
threatened release was not caused by the negligence of the fiduciary. In addition, a
fiduciary will not be exposed to personal liability by undertaking or directing another
person to take response actions to address releases or threatened releases of hazardous
substances. A fiduciary will also not forfeit its immunity from liability by taking the
following actions:







terminating the fiduciary relationship;
including covenants or other conditions requiring compliance with environmental
laws in the fiduciary agreement;
monitoring or conducting inspections of a facility or vessel;
providing financial advice or other advice to other parties in the fiduciary
relationship including the settlor or beneficiary;
restructuring or renegotiating the terms of the fiduciary relationship;
administering a vessel or facility that was contaminated prior to the
commencement of the fiduciary relationship; or
declining to take any of the foregoing actions.
It is unclear if the latter requirement means that a fiduciary who fails to respond to a
release of hazardous substances can still take advantage of the fiduciary safe harbor. A
fiduciary who has knowledge of a release would probably be well-advised to authorize
response actions to address any such release or threatened release since such actions will
not be expose the fiduciary to liability, and the failure to take such action might amount
to negligence that could expose the fiduciary to personal liability.
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1999 CERCLA Contribution Action Against Fiduciary Bank
Under the Lender Liability Amendments, the limitation on the liability of a fiduciary will
not apply if the fiduciary negligently caused or contributed to the release or threatened
release of a hazardous substance. Relying on this negligence exception, the Court of
Appeals for the 11th Circuit reversed a district court ruling in Canadyne-Georgia Corp.
v. NationsBank, N.A.,54 and allowed a former site owner to proceed with a contribution
action against a bank that served as trustee for a trust that held a general partnership
interest in a limited partnership owning the site.
In this case, a pesticide manufacturer had been owned by a general partnership. More
than 50% of the limited partnership interest was held by inter vivos trusts established for
the benefit of the general partner’s daughters. A predecessor to NationsBank had been
appointed as a co-trustee of the daughters’ trusts in 1942. After the owner/general
partner died in 1945, the bank became trustee of the trust, which included the general
partnership interest. In 1977, the pesticide business was sold to the plaintiff who, in turn,
sold the business in 1984. From 1990 to 1995, the plaintiff was issued orders to
remediate contamination at the pesticide plant and to pay for the relocation of residents
living near the site.
The plaintiff then filed a suit to recover its response costs under CERCLA, the Georgia
superfund law and common law. The plaintiff alleged that the bank served as trustee
during the time that hazardous substances had been released at the site. The bank argued
that the Lender Liability Amendments protected fiduciaries from personal liability. The
plaintiff responded that there was an exception when fiduciaries acted in another
capacity and they directly or indirectly benefit from that capacity. The district court
dismissed the plaintiff’s complaint on the grounds that the bank was not a liable person
under both CERCLA and the state superfund law.
However, the 11th Circuit said that at the time the bank was serving as trustee, individual
partners held title to real property. Although the bank technically held the general
partnership in trust, it held legal title to the general partnership interest under Georgia
law. At the time the bank held its general partnership, Georgia law provided that
individual partners and not a partnership held title to real property. Since the bank had
owned an interest in the general partnership that owned the site, the court said that the
bank held title to whatever property the general partnership owned which in this case
was the contaminated plant.
The court then turned its attention to the CERCLA fiduciary exemption would preclude
an action against the bank that held title only by virtue of its status as a trustee. Since the
complaint alleged that the bank had negligently caused the release of hazardous
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substances, the court found that the complaint satisfied the very low threshold that is
required for surviving motions to dismiss and allowed the action to go forward. In so
holding, the court made it clear that it was not suggesting that the bank was liable under
CERCLA. The court added that the bank would be free to bring a motion for summary
judgment once limited discovery had been conducted on whether the bank was negligent
and whether its negligence had caused or contributed to the release. The matter was
remanded to the district court to determine if the releases that took place at the facility
could be attributed to the bank’s affirmative negligence. 55
This case shows how easy it may be for a plaintiff to keep a bank in a CERCLA case.
While the bank ultimately prevailed in this case, it was forced to incur litigation costs to
demonstrate that it is entitled to the fiduciary exemption. Moreover, because the state
superfund law has a different test for determining fiduciary liability, the bank may also
have to defend the state superfund claim even if it survives the CERCLA claim. The
trust and estate departments of financial institutions should review the standards for
fiduciary liability in states where they administer estates that contain operating
businesses.
H. THIRD PARTY ACTIONS
The CERCLA Lender Liability Rule did not extend protection for secured creditors
against actions filed by third parties. Since private parties bring most lender liability
cases, this was a major concern to the financial lending community. By amending the
definitions of owner or operator and the liability provisions of CERCLA, the Lender
Liability Amendments seems to have addressed this flaw. Private parties will now have
the burden of establishing that a lender is a PRP and does not qualify for the secured
creditor’s exemption.
III. LENDER LIABILITY WHERE BANKS HOLD EQUITY INTEREST IN
BORROWER
The CERCLA and RCRA secured creditor exemptions apply when a lender holds indicia
of ownership “primarily to protect a security interest.” What happens, though, when a
bank may acquire shares in its borrower, high interest subordinated notes or other debt
instruments as part of the financing arrangement. Would a bank be deemed to no longer
be primarily protecting its security interest and therefore lose its safe harbor by virtue of
holding stock?
Unlike the definition of "participation in management", there are no objective criteria for
determining when a secured creditor holds “indicia of ownership primarily to protect its
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security interest”. EPA made it clear in its CERCLA Lender Liability Rule that this term
was to be interpreted on a case-by-basis. With no definition in the current version of
CERCLA, we need to turn to the case law to see how courts have interpreted the meaning
of this phrase. Courts have adopted EPA's approach and will examine the facts of a
particular transaction to determine the reason why the lender held indicia of ownership.56
A bank seeking to take advantage of the secured creditor exemption would have the
burden of proof to initially establish that it was entitled to the exemption.57
The vast majority of cases interpreting the phrase "primarily to protect the security
interest" involve situations where the lender foreclosed on property and held title for a
period of time.58 These cases focus on why the lender held title to the property or whether
the lender complied with the foreclosure guidelines set forth in the Lender Liability Rule
or the 1996 CERCLA Amendments.
There is also a line of cases holding that when a bank has title to property in a saleleaseback transaction, the bank has indicia of ownership primarily to protect its security
interest. These courts have indicated that as long as the exemption will protect banks if
their primary purpose was to protect a security interest and not to profit from an
investment opportunity presented by prolonged ownership of property.59 However, the
mere fact that a lender might receive secondary benefits from its ownership of the
property such as tax benefits from the depreciation of the property will not void its
exemption.60 Thus, these cases are not particularly helpful for evaluating if a lender can
lose its exemption for its secured loans because of its equity stake in its borrower.
One case that sheds some light is Stearns & Foster Bedding Company v. Franklin
Holding Company et al,.61 In this case, defendants Franklin, M & T Capital Corporation
("M & T") and Rand Capital Corporation ("Rand")purchased promissory notes to finance
the acquisition of a fire extinguisher manufacturer, Stop Fire-DE in 1973.62 In exchange
for money, each lender received a security interest in equipment, certain stock warrants
and one seat on the seven member board of directors (the "Board"). Franklin attended
board meetings at the plant and also hosted board meetings. The 1973 agreement also
appointed Franklin as agent for the other note holders. In December 1975, the Board
approved a bankruptcy filing. In January 1976, Franklin and M & T exercised their
warrants and became the sole shareholders of the company. They reconstituted the Board
so that it was comprised of the three investors and the President of the Stop Fire-DE. The
Board then fired all of the officers except for the President and hired new executive
officers. Franklin admitted that it participated in the interviewing and hiring of a new
comptroller. In addition, after the President was fired in March 1977, Franklin's
Executive Vice President served as President of the new company for seven months.
Also in 1977, Rand exercised its warrants. Franklin and M & T continued to infuse fresh
capital into the company until it was adjudicated bankrupt by a consent decree under the
old Bankruptcy Act in April 1976. Franklin then purchased the physical assets of the
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debtor on behalf of itself and M & T, created a new entity and transferred the assets to the
new entity, Stop Fire-NJ. In 1979, the plaintiff acquired title to the manufacturing facility
located in South Brunswick, New Jersey. In 1989, the plaintiff was forced to comply with
ECRA and filed a cost recovery action against the former owners of the property and the
lenders/shareholders. The plaintiff argued that Franklin and the other lenders/investors
should be considered operators of the facility. Much of the decision focuses on whether
the three lenders could be deemed to have exercised actual control over the company.
However, the opinion did contain some useful language regarding permissible
motivations of lenders that would not cause them to lose their exemption. In concluding
that the plaintiff had not established that Franklin had exercised actual control over the
company sufficient to make it an operator of the facility, the court said Franklin was
seeking to maximize its return on its investment and not to operate a fire extinguisher
company. For M & T, the court said that "the mere fact that a lender takes an equity
position in its debtor does not necessarily place the lender beyond the pale of… [the
secured creditor's exemption]" 63 [emphasis added]. The court went on to say that a
decision to convert debt to equity "..signals an abandonment of an effort to protect a
security interest. The lender's role then arguably becomes that of an investor."64 The court
also said that the fact that a lender primarily motive was no longer to protect its security
interest merely meant that the lender could no longer avail itself of the secured creditor's
exemption and that it's liability would have to then be judged under the traditional
CERCLA owner or operator analysis.65 Though this case was decided after the passage of
the 1996 Lender Liability Amendments, that law did not play a role in the decision
because the issue before the court was whether the defendants could be held liable as
operators of the facility. 66 This case suggests that a lender should not lose its secured
creditor exemption simply because of its minority stake in a borrower or because it
received dividends in connection with its stockownership. Instead, the critical factor
would be whether Cerberus was taking liens on the assets primarily to protect its term
loans or whether the primary purpose of the financing facility was to facilitate the
purchase of the stock. As long as the primary purpose of the financing facility is to
protect its security interest, it would seem that the lender should not lose its secured
creditor exemption simply because as a secondary benefit of the transaction it receives
dividends or generates income from its stock ownership. However, if the primary purpose
of the financing facility is to facilitate the purchase of the stock, then the lender would
likely not be eligible for the secured creditor exemption.
Another case addressing the impact of a lender's profit motive on the secured creditor
exemption is DuFrayne v. FTB Mortgage Services, Inc.67 In this case the plaintiffs
purchased a home in 1989 for $140,000 financed by a $108,000 mortgage. Two years
later, they discovered that their home along with approximately 40 others had been
constructed on radium ore tailings from a local mill that had been used as fill material.
EPA placed the area on the federal superfund list and temporarily relocated residents
while it installed air exchangers. After completing its investigation, EPA issues a cleanup
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remedy that provided the residents with an option of either relocating to a new home offsite or staying on-site in either a new home or reconstructed existing home. The plaintiffs
elected to have a new home constructed. Meanwhile, the plaintiffs had stopped making
their mortgage payments. Instead of foreclosing on the contaminated property, their
lender elected to recover the amount due on the mortgage note and received a judgment
of approximately $126,000. Shortly after the entry of the judgment, the plaintiffs filed a
chapter 11 bankruptcy petition. The lender then sold the note to the defendant. The
plaintiff's initial reorganization plan was denied confirmation because they had failed to
provide the defendant with adequate notice. Their amended plan requested that the
defendant's claim be reduced to zero because the defendant was liable to them as a
CERCLA owner. The defendant filed a motion to dismiss, arguing that as a secured
lender it was not liable under CERCLA. The crux of the plaintiff's claim was that the
primary motive of the defendant in holding indicia of ownership was not to protect its
security interest but to profit from the cleanup performed by EPA. They argued that the
defendant acquired the note knowing that EPA planned to build a new residence and
intended to capitalize on the investment opportunity presented by the long-term
ownership of that interest. The court recognized that an investment motive is present in
all mortgage financing transactions. However, the court wrote that the defendant's
investment interest was in the paper note and not the property. Noting that mortgages
were routinely traded in the secondary mortgage market, the court said that the defendant
had no greater interest in the property than the original mortgagee had it not parted with
the note. In addition, the court said the plaintiff's could not point to any cases where the
secured creditor exemption was lost because the lender acquired its mortgage interest at a
discount in the secondary market. Since the plaintiff's failed to allege any facts to support
the claim that the defendant could be liable as a CERCLA owner, those counts in the
adversary proceeding were dismissed.
Like the mortgagee in the DuFrayne case, it is not unusual for lenders financing the kind
of acquisition contemplated in the proposed transaction to also take small equity positions
in their borrowers. Therefore, as long as the primary motive for the indicia of ownership
is to protect its security interest, the lender could argue that the fact it may derive a profit
from its minority equity interest in its borrower should not cause it to forfeit its secured
creditor exemption.
None of the cases holding shareholders liable under CERCLA have imposed liability
solely on the basis of stock ownership. If an investment fund or institutional investors
loses its secured creditor exemption, its CERCLA liability would be based whether it had
a controlling interest in a company. Thus, investors with a minority interest in a
corporation or with representation on a board proportionate to their shares should not
incur liability if they do not engage in active management or otherwise exercise
operational control over the corporation.
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However, the CERCLA liability net is still quite wide. A decision by the Court of
Appeals for the Second Circuit illustrates how an investment bank which simply held
stock in a reorganized company can be drawn into a CERCLA contribution action.
In In Re Duplan Corp et al v. Esso Virgin Islands. Inc., Duplan Corporation (“Duplan)
filed a petition for reorganization under the old Bankruptcy Act in 1976. Six years before
the bankruptcy filing, Duplan had acquired Laga Industries, Ltd. (“Laga”), a textile
manufacturer located in the Virgin Islands. In 1979, the District Court for the Southern
District of New York allowed the reorganization trustee to sell the Laga facility located in
Tutu, St. Thomas. In 1981, the reorganization plan was confirmed. Pursuant to the
confirmation order, Laga was dissolved and Duplan was renamed Panex Industries, Inc.
(“Panex”). The creditors of Duplan were given cash and shares in Panex in partial
satisfaction of their claims. One of the creditors who received share in Duplan/Panex was
Goldman, Sachs & Co. The confirmation order also permanently enjoined all creditors
from asserting, continuing or commencing any claims against Duplan which arose prior
to the filing of the bankruptcy petition. However, the permanent injunction did not apply
to administrative claims arising after the filing of the petition and before the confirmation
plan was approved. Duplan/Panex expressly assumed such claims. In 1983, the district
court issued a Final Decree discharging the debts of Duplan/Panex and barring persons
with claims against Duplan/Panex from commencing or pursuing lawsuits against the
company or any party with an interest in Duplan/Panex. In September 1984, Panex sold
off its major operating subsidiaries and the shareholders voted to dissolve the company.
A certificate of dissolution was filed in April 1985. Over $64 million in proceeds were
then distributed to Duplan/Panex shareholders including over $9 million to Goldman
Sachs. In September 1985, a liquidating trust in the amount of $6 million was created to
cover any contingent liabilities of the company. The proxy statement for the liquidating
trust which was provided to all shareholders expressly indicated that if the funds in the
trust were insufficient to cover the company’s liabilities each shareholder could be liable
for any unpaid liabilities up to the amount of the distribution they received from the
liquidation of the company. After no significant claims surfaced, the trust distributed
another $4.5 million to the former shareholders in July 1987, leaving approximately $1.1
million remaining in the trust. In 1987, EPA discovered that property adjacent to the
former Laga facility was contaminated with a variety of hazardous substances. In 1988,
EPA performed a removal action and notified a number of oil companies that they had
been identified as PRPs for the site. In 1989, property owners and lessees whose wells
were contaminated filed a lawsuit against the PRPs seeking damages. In 1992, the PRPs
brought a $20 million CERCLA contribution claim as well as RCRA and common law
claims against Duplan/Panex and its former officers and directors (the “Laga
Defendants”) claiming that Laga was responsible for the PCE that had been detected in
the groundwater.
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A series of complicated rulings followed. The Laga Defendants filed a motion in the
federal district court for the Virgin Islands arguing that they could not be sued under the
Delaware dissolution statute and that the bankruptcy proceeding had discharged the
claims. The court ruled that the common law claims were barred by the state dissolution
statute but refused to dismiss the CERCLA claims because CERCLA pre-empted the
state dissolution statute. The court further held that because CERCLA was enacted in
1980, the CERCLA claims were not discharged. After the PRPs obtained an injunction
from the court preventing the trustee from winding up the trust, the Third Circuit reversed
the injunction and instructed the district court to dismiss the CERCLA claims because
they were time-barred by the state dissolution statute. Unable to proceed against the Laga
Defendants, the PRPs then filed a CERCLA contribution action against the Trust and the
shareholder-distributees. The district court held that under Delaware law, the liquidating
trust was in essence a continuation of the dissolved corporation for the purpose of
resolving claims by and against the dissolved corporation. The court also refused to grant
the defendant’s motion that the PRPs could not proceed against the shareholders who had
received liquidating distributions from the corporation and distributions from the assets
of the liquidating trust. The court also issued an injunction preventing the trustee from
disbursing any additional assets of the trust to pay off remaining debts of the corporation
or from filing a motion in the Delaware Chancery Court to terminate the trust since this
could effectively terminate the CERCLA and other environmental claims. In 1996,
Goldman filed a motion with the bankruptcy court to enforce the injunction prohibiting
lawsuits against those having interests in Duplan/Panex. However, the bankruptcy court
ruled that the discharge only applied to claims that had arose prior to the filing of the
petition. Since CERCLA had been enacted after the date that the petition had been filed
and after the bar date for filing proofs of claim, the court held that the CERCLA claims
were not discharged.
The bankruptcy court ruling was affirmed by the district court in 1999 and by the Second
Circuit. The Second Circuit indicated for a bankruptcy claim to be valid, the claimant
must have a right of payment and that right must arise prior to the filing of the petition.
The court said that a claim would be deemed to have arisen pre-petition if some legal
relationship had been in existence between the debtor and creditor before the petition was
filed. The court further noted that all of the elements comprising that legal obligation had
to be satisfied prior to the filing of the bankruptcy petition. The court then found that
CERCLA created a new scheme of liability. Even though the conduct leading to the
CERCLA liability may have taken place prior to the bankruptcy petition, the court ruled
that the CERCLA statutory claims could not have arisen until the statute had been passed
in 1980. Assuming that those claims arose on the date CERCLA was enacted, the court
said the CERCLA claims could be considered administrative claims which the
reorganized corporation had expressly assumed and agreed to pay. However, the court
specifically indicated it was not determining that the claims arose at that time and before
the issuance of the confirming order. The court did bar the RCRA 7002 actions because
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EPA had satisfied the diligently prosecution requirement. On the common law claims,
the court found that the bankruptcy court had not determined when those claims arose. As
a result, the court remanded the CERCLA and common law to the district court for
further consideration.
To the extent that a shareholder/bank monitors compliance, has knowledge about
environmental conditions at a subsidiary’s plant, or merely provides environmental or
general business advice to its borrower, it would not likely incur liability in a majority of
jurisdictions in the absence of actual involvement in the operations of the plant.
Furthermore, actions indicative of a prudent investor, such as monitoring of a
subsidiary’s fiscal operations, and consolidation of certain administrative functions
should also not expose a bank to liability so long as the actions do not cross the line into
daily management of the business.
2002 Citigroup $7.2 million Settlement
A federal district court approved a settlement that resolves the liability of S.W. Shattuck
Chemical Company (“Shattuck”) and its corporate affiliates Philbro Resources
Corporation, Salomon Smith Barney Holdings, Inc. and Citigroup, Inc. for a former
radium-processing plant located in Denver. Citigroup Inc. became involved in this site
through its acquisition of Salomon Smith Barney Holdings, Inc. (“SSBH”) who had in
turn had acquired Philbro Resources Corporation, a prior owner of Shattuck. SSBH had
issued a corporate guaranty of Shattuck’s obligations in June 2000 and a predecessor of
SSBH had issued another corporate guaranty in 1993.
Under the terms of the consent decree, Shattuck agreed to pay $7.2 million for response
costs and natural resources damages. In addition, Shattuck will establish a trust and
convey the 5.9-acre parcel to the trust. The trustee will be obligated to sell the site that is
valued at more than $1 million and then deposit the net proceeds of the sale into a
special account EPA has establish for the site. As part of the settlement, EPA agreed that
the guarantees were no longer in effect. The purchaser and trustee received a CNTS for
liability arising out of the existing contamination provided the parties cooperate with
EPA and do not interfere with EPA response actions. The Shattuck’s corporate affiliates
also received a CNTS. Shattuck originally paid $26 million to entomb radioactive waste
within a cement cap. After community groups became concerned about the adequacy of
the cap, EPA amended the Record of Decision (“ROD”) to demolish the cement monolith
encasing the low level radioactive materials, dispose the stabilized soil, fly ash and
cement monolith debris, and to remove use restrictions imposed on the site as a result of
the prior remedy.
IV. LIABILITY OF BANKS IN SECURIZATION
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Lenders can face liability in securitizations if they do not adequately investigate
environmental issues. This exposure was illustrated in LaSalle Bank National Association
v. Lehman Brothers Holdings, Inc.68
In this case, Lehman Brothers Holdings (Lehman) entered into a Mortgage Loan
Purchase Agreement ("MLPA") with First Union Commercial Mortgage Securities, Inc.
("First Union") on November 1, 1997 for more than 200 commercial and multi-family
mortgage loans. Pursuant to the MLPA, the mortgages were deposited by First Union into
a trust fund with a face value of over $ 2.2 billion. Certificates were issued pursuant to a
Pooling and Service Agreement ("PSA") 69 and the mortgage loans were "securitized" on
November 25, 1997. Various classes of investment certificates bearing a different
payment priority and corresponding level of risk were offered for sale pursuant to a
Prospectus Supplement. The lowest-rated class, which bore the "first dollar loss" incurred
by the trust, was known as the "B-piece." CRIIMI MAE, Inc. ("CMI") purchased the
entire B-piece for $ 170 million.
Prior to the execution of the MLPA and the PSA, CMI sent First Union and Lehman a
Quote Letter setting forth the terms under which it would purchase the B-piece. Under
the terms set forth in the Quote Letter, Lehman was required to provide CMI with copies
of its underwriting files so that CMI could "re-underwrite" the loans. CMI then had the
right to demand that loans not approved by it would not be included in the pool. After
CMI completed re-underwriting the loans, it was required to transfer the loan documents
it had received from Lehman to CMSLP. CMI exercised this option and rejected seven
loans totaling over $ 40 million.
In the MLPA, Lehman made numerous representations and warranties with regard to
each mortgage loan it sold pursuant to the MLPA. According to § 3(b) of the MLPA,
Lehman made these representations and warranties "for the benefit of the Purchaser and
the Trustee for the benefit of the Certificate holders." Section 3(c) of the MLPA provided
that if Lehman received notice of a breach of its representations and warranties, it had the
duty to cure the breach or repurchase the affected mortgage loan.
One of the mortgages in the trust was a $ 9 million mortgage loan that Lehman sold to
First Union. This loan was was secured by industrial property located in Farmingdale,
New Jersey (the “FEL Facility”). The property was owned by Dr. William D. Hurley
("Hurley") and leased to his company known as Frequency Engineering Laboratories
("FEL"). The FEL Facility has had a long history of environmental problems. FEL was a
government contractor that manufactured military communications equipment and
weapons systems. The manufacturing process involved the use of heavy metals and
volatile organic solvents. After Phase I environmental site assessments in 1994 and 1996
recommended a phase II investigation to determine the extent of any potential soil or
groundwater contamination, a limited soil and groundwater investigation was performed
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in August 1996. The phase II revealed that the groundwater had been impacted with
volatile organic compounds ("VOCs") and recommended further evaluation of the
groundwater. Environmental counsel retained by Hurley agreed with the conclusions of
the Phase II and recommended that the results be reported to the New Jersey Department
of Environmental Protection (“NJDEP”). Ten months later, Hurley’s environmental
counsel retained another consultant to perform additional sampling for metals but not
VOCs (the “Phase III”). The consultant then issued a report recommending that no
further action and attached the results of the 1996 Phase II report.
At this same time, Hurley was seeking refinancing of the FEL Facility. He transferred the
FEL Facility to an entity owned by him and known as WDH Howell, LLC ("Howell"),
and submitted a loan application to Holliday Fenoglio, L.P., a Florida mortgage entity
("Holliday"). Holliday had a contract with Lehman whereby Holliday would locate and
originate commercial mortgage loans and Lehman would agree to purchase these loans
from Holliday for inclusion in a mortgage pool. In October 1997, Holliday extended a
mortgage loan to Howell in the amount of $ 9 million that was secured by the FEL
Facility (the "FEL Facility Mortgage Loan"). In the mortgage, Howell represented that it
"had not failed to disclose any material fact that could cause any representation or
warranty made [in the mortgage] to be materially misleading." Howell and Hurley also
made broad environmental representations and warranties in the mortgage and the
environmental indemnity.70 Lehman then purchased the mortgage loan and resold it to
First Union pursuant to the MLPA. Pursuant to the terms of the FEL Facility Mortgage
Loan, Hurley, as indemnitor, and Howell, represented that the property was in full
compliance with all applicable laws and that all representations and warranties made by
each indemnitor in any loan document were true and correct. In addition, Hurley and
Howell also executed an Environmental Indemnity Agreement where they made
numerous representations and covenants concerning the environmental condition of the
FEL Facility. A breach of any one of these representations and covenants constituted a
default under the terms of the FEL Facility Mortgage Loan. Two days after the mortgage
loan closed with Lehman, Hurley entered into a voluntary cleanup agreement with the
NJDEP. In June 1998, NJDEP advised Hurley that the Phase II was deficient because it
had not sampled for VOCs. Further sampling in April, September and October 1999, and
in May 2001 revealed VOCs far exceeding the NJDEP groundwater quality standards.
In April 2000, the FEL Facility Mortgage Loan was transferred to CMSLP for special
servicing because Howell had defaulted in making mortgage payments. After CMSLP
began servicing the loan, it had another Phase I assessment performed on the FEL
Facility, which revealed serious environmental contamination. On August 3, 2000,
CMSLP instituted a foreclosure action against the FEL Facility property in a state court
in New Jersey that was stayed when Howell filed a Chapter 11 bankruptcy petition. On
December 11, 2000, CMSLP notified LaSalle Bank and others that the warranties and
representations set forth in the MLPA had been breached because the FEL Facility
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property was environmentally contaminated at the time of the loan. The request was
made that the Master Servicer demand that Lehman cure or repurchase the loan pursuant
to § 2.03(a) of the PSA. A copy of that letter was sent to Lehman. On January 25, 2001,
Lehman denied the existence of any breach.
On August 1, 2001, plaintiff LaSalle Bank filed a lawsuit alleging that Lehman breached
certain representations and warranties and certain remediation provisions of the MLPA. It
is alleged that, notwithstanding representations and warranties of Lehman, the FEL
Facility was environmentally contaminated at the time of the sale, and that the borrower
was in default under its mortgage at the time that the MLPA and the PSA were executed.
71
The plaintiff argued Howell and Hurley made numerous misrepresentations about the
environmental condition of the FEL Facility. However, Lehman countered that it
represented in Warranty “XX” that it had no knowledge of material and adverse
environmental conditions other than those disclosed in the referenced environmental
reports. Lehman further argued plaintiff's interpretation of Warranty “XIV” would
require that Lehman be responsible for warranties of adverse environmental conditions
that were not disclosed in the reports.
The court concluded that that Howell and Hurley were so anxious to secure the loan from
Holliday that they attempted to conceal existing environmental contamination by failing
to disclose in the loan documents numerous material facts concerning the environmental
condition of the FEL Facility. Based on the evidence of record, the court found as a
matter of law that the FEL Facility Mortgage was in default on November 25, 1997.
Lehman argued that CMI did its own "re-underwriting" and that as a result of its due
diligence CMI should be the party to bear the loss. However, the court said that CMI was
merely the purchaser of the so-called "B-piece," and the due diligence conducted by it
was done solely for its own account as a certificate holder. The court said that CMI had
no duty to undertake any due diligence on behalf of the trust or any of the other
certificate holders. LaSalle Bank, as the Trustee, had the right to rely in the event of
default on Lehman's representations and warranties, including those relating to the
origination and underwriting practices employed by Holliday and Lehman with respect to
the FEL Facility Mortgage Loan. The court said that Lehman and not LaSalle Bank
assumed the risk that the mortgaged property was environmentally contaminated when
the $ 9 million was loaned to Hurley.
The court went on to say that MLPA did not exculpate Lehman from liability for the
default of Howell and Hurley merely because the facts were not uncovered by Lehman's
environmental due diligence. Because of the multiple misrepresentations by Howell and
Hurley, the court found that Lehman would have a viable claim against Holliday, Howell
and Hurley.72 As a result, the court held it would not be unfair to hold Lehman
accountable for unknown environmental conditions.
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Indeed, the Court said found the evidence established that as a matter of law that the
origination and underwriting practices of both Holliday and Lehman were not prudent
and did not meet customary industry standards. As a result, the court found that Lehman
had breached the Warranty xxii and Warranty xlvi of the MLPA, 73 and that the defaults
were material. In so holding, the court pointed to the following evidence:




Lehman and Holliday did not follow the Phase I recommendation even though
the Prospectus Supplement informed investors that Phase I recommendations
were being followed.
Lehman and Holliday did not obtain a new Phase I report before the closing as
required by Lehman's guidelines and as represented in the Prospectus
Supplement.
Lehman obtained an updated environmental assessment only after the loan had
closed, and
Holliday suggested to the consultant that it come to the same conclusions as the
prior report.
The court also found that LaSalle Bank, as trustee, was not involved in any way in the
origination of the loan and had the right under the various agreements to look to Lehman
and its representations and warranties to protect itself from loss resulting from the
default. 74
Lehman had claimed that LaSalle Bank was placed on inquiry notice of a potential breach
of warranty because Warranty xx referenced reports that disclosed that the FEL Facility
was contaminated. However, the court concluded that the reports referenced in Warranty
xx would not have placed LaSalle Bank on inquiry notice or that Lehman had breached
its warranties because the Phase III concluded that no further action was required. The
court said that a person of ordinary prudence reviewing this report would have concluded
that if any of the contaminants found at the FEL Facility were of concern, the report
would have recommended further testing or a remediation plan but would not have
recommended no further action should be taken.
The court also found significant that the Phase III only dealt with a small portion of the
FEL Facility and did not address other material matters (e.g., that there was
environmental contamination at an adjacent site) and that the Phase I had recommended
that a full site investigation be conducted.
Because the court found that Lehman has breached warranties and representations
contained in the MLPA, it was required pursuant to § 3(c) of that Agreement to
repurchase the affected mortgage loan from LaSalle Bank at a price equal to the purchase
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price. If Lehman could not repurchase the FEL Facility mortgage loan because of the
pending bankruptcy proceedings, the court ruled that LaSalle Bank would be entitled to
recover $ 11,497,861.86 in damages as alternative relief.75
V.
STATE ENVIRONMENTAL AND COMMON LAW ACTIONS AGAINST
BANKS
There are approximately two-dozen states that have enacted some form of secured
creditor exemption to their state counterparts to CERCLA (“mini-Super-fund Laws”).
Since the Lender Liability Amendments do not address these state mini-Superfund Laws,
financial institutions can still face liability under these state laws even if the lenders
comply with CERCLA.
The state secured creditor exemptions may not necessarily track the CERCLA or RCRA
secured creditor exemptions. Thus, financial institutions should become familiar with the
requirements of any state lender liability laws or requirements before foreclosing on
property located in those states or engaging in any workout activities in those states.
For example, In CoreStates/New Jersey National Bank v. DEP76 , a bank foreclosed on
property in New Brunswick. The bank performed a Phase I Environmental Site
Assessment prior to foreclosure; erected fencing with razor wire, maintained motion
sensors, fire monitoring and sprinkling systems; installed floodlights and hired a private
detective to inspect the site several times a week. The bank complied with the New Jersey
Industrial Site Recovery Act (ISRA) and obtained a no further action letter from the
NJDEP. The bank also retained a property management company to actively market the
property. The phase I had recommended that the bank dismantle or drain two
transformers at the property but the bank declined to follow this advice because the heavy
power transformers were critical to the marketing of the property. Vandals subsequently
broke into the property and during the process of removing copper wire from the
transformer, caused PCB-contaminated oil to spill that contaminated the groundwater
beneath the property and flowed to a stormwater where it eventually impacted a stream.
The security measures and active marketing of the property by the bank clearly complied
with the requirements of the CERCLA secured creditor exemption. Despite these actions,
the administrative law judge found that the bank was negligent because it had been aware
of prior vandalism yet declined to drain the transformers as advised by its environmental
consultant.
The state lender liability laws usually only limit liability under the state superfund law
and do not provide protection against other statutory or common claims. Thus, even if a
lender could qualify for a state secured creditor exemption, it should evaluate the
possibility of liability under other state statutory or common laws. For example, in
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Carrion v. 605 Realty Associates77, the federal District Court for the Southern District of
New York refused to dismiss claims filed against the Federal Home Loan Mortgage
Corporation (“Freddie Mac”) for damages sustained by exposure to LBP. In this case,
Freddie Mac purchased a building in New York City at a foreclosure auction and
transferred title six months later to the co-defendant. During the time that Freddie Mac
owned the building, the plaintiff and her two children moved in with the building
superintendent. In February 1993, plaintiff’s children were found to have elevated lead
levels in their blood and the New York City Department of Health issued an Order to
Abate Nuisance in March 1993. Freddie Mac transferred title one week later to the codefendant. Plaintiffs commenced their action against the current owner in 2002 who, in
turn, filed cross-claims against Freddie Mac. For a landlord to be liable under the New
York City Lead Abatement Law, a plaintiff must establish that the landlord had actual or
constructive notice of the lead hazard and that children six years or younger resided at
the premises. Following discovery, Freddie Mac moved for summary judgment, arguing
it was not liable because it was not aware that young children lived in the apartment.
However, the court ruled that the superintendent’s knowledge that young children were
residing in the building could be imputed to Freddie Mac. As a result, the court found that
a reasonable jury could conclude that Freddie Mac had constructive knowledge of the
LBP hazard during the time it held title to the building.
In Edwards v. First National Bank of North East 78, the owner of a gasoline station/minimarket defaulted on its mortgage and the defendant bank foreclosed on the property.
After the bank acquired the title to the site, the bank performed a tightness test on USTs.
While the USTs passed the test, petroleum contamination was detected when the USTs
were removed. Presumably, the contamination was from older tanks that had been
replaced. Meanwhile, the defaulted borrowers also operated a day care center from their
home which was located near the former mini-market. Several weeks prior to the UST
excavation the borrowers had installed a drinking water well on their property to comply
with local health code requirements governing day care centers. One month after the well
had been installed, the plaintiff/borrower began to smell gasoline in their house. When
the odor intensified, they had the well water sampled, which confirmed the presence of
petroleum in their drinking water. The plaintiff/borrowers then filed suit for injury to
their real and personal property. They filed common law claims for negligence, trespass,
nuisance and strict liability and also filed a claim under the state Water Pollution Control
and Abatement Act (the “Act”). The trial court ruled that the state lender liability statute
which was patterned after the CERCLA provision insulated banks from any
environmental liability. However, a state appellate court reversed the decision. The court
said that banks which complied with the requirements of the state lender liability law
were only immune from suits for the cleanup of contamination. The court held that state
lender liability law did not pre-empt common law causes of action and remanded the case
back to the trial court for a hearing on the merits of the common law claims.
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The importance of performing due diligence and considering state environmental laws
prior to foreclosure is illustrated in the following two cases. In Hawkeye Land Co. v.
Laurens State Bank,79 Leo Koenig operated a bulk petroleum storage facility under a
lease with the plaintiff and had also granted a security interest in the leasehold
improvements of the site. When the Koenig defaulted on his lease, the plaintiff/property
owner terminated the lease and ordered the Koenig to remove the storage tanks and
improvements on the property as required by the lease. By this time, Koenig had also
defaulted on his loan obligation with Laurens and when the bank threatened to foreclose,
the Koenig agreed to convey all of its interest in the leasehold improvements to the bank.
Koenig then notified the plaintiff that the bank had succeeded to his interest in the storage
tanks and improvements and he was no longer responsible for removing these structures.
When the plaintiff was unable to sell the property because of the presence of the USTs,
the plaintiff received an offer from a salvage company and requested that the bank
relinquish its claim to the structures. The bank refused and also declined the plaintiff’s
request to remove the tanks. When a buyer for the property was found, the bank insisted
that $1500 of the $3500 of the sale price be paid to the bank in exchange for its release of
its interest in the improvements. When the sale fell through, the plaintiff then filed suit
against the bank seeking injunctive relief ordering the bank to remove the storage tanks.
The bank argued that the storage tanks were fixtures that had become part of the real
estate and were therefore the responsibility of the plaintiff. After a state appellate court
had reversed a ruling in favor of the bank, the Iowa Supreme Court ruled that the bank
had exercised sufficient control over the storage to be deemed the owner of the
improvements and that their continued unwanted presence amounted to a trespass.
Therefore, the court ordered the bank to remove the storage tanks.
Likewise, in Nischke v. Farmers and Merchants Bank80 the defendant bank extended a
loan to the plaintiff, who operated a gasoline station. The loan was secured by certain
assets, including the plaintiff’s equipment. When the plaintiff defaulted on the loan, the
defendant bank accepted a transfer of assets in lieu of foreclosure. Following transfer, the
bank sent the plaintiffs husband a letter confirming that it had taken possession of their
assets and offered to sell back the gasoline pump and UST. The court found that the bank
had exercised sufficient dominion and control over the USTs and allowed the plaintiff to
recover its remedial costs even if they exceeded the value of the property.
B. Liability of Lenders for Inadequate Disclosure of Environmental Conditions
A number of states also have disclosure statutes that require disclosure of environmental
conditions. Lender liability statutes in those states generally to not provide protection for
common law claims or for failing to comply with the disclosure requirements. Lenders
should carefully review the provisions of state lender liability laws and the scope of
environmental disclosure laws as part of their the loan due diligence.
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A Rhode Island Superior Court jury ruled that Fleet Bank was liable for $5.14 million in
damages for failing to inform purchasers of a general store that the property drinking
water was contaminated. With accrued interest, the total award could be $10.3 million.
In Foote v. Fleet Financial Group,81Fleet Bank-NH (Fleet) foreclosed on the Old
Spofford General Store in 1991 and then conveyed the property to a subsidiary, Industrial
Investment Corporation-NH (IIC) that was established to manage and commercial real
estate for Fleet. After a discharge of heating oil occurred in 1995, the New Hampshire
Department of Environmental Services (NHDES) requested that Fleet perform an initial
site characterization report. An environment consultant retained by the Fleet Corporate
Environmental Risk Management office found contaminants not commonly associated
with fuel oil above the state groundwater quality standards and elevated levels of
dichlorethane in the drinking water well. The consultant recommended additional
monitoring, removal of fuel detected in the wells and an investigation to determine if the
contaminants were originating from an upgradient source. Approximately 41 days after
receiving the environmental report, Fleet advertised the property for public auction with a
minimum bid of $30K. According to the plaintiffs, Fleet had originally sought $120K for
the property but after receiving the report, the bank vice president managing the property
recommended accepting any offer above the minimum bid. The plaintiff’s also claim that
they asked the Fleet property manager about rumors of contamination at the auction and
that he responded that the property was being sold with a “clean bill of health.” The
purchasers acquired the property for $45K and lived at the site while operating the
general store. The sales agreement contained an acknowledgement that the seller never
physically occupied the site and had no knowledge regarding the private water supply,
sewage disposal system or other conditions required by the New Hampshire residential
property disclosure law. Five days after the closing, NHDES advised Fleet that it should
implement the recommendations contained in the environmental report and requested a
budget. Fleet did not respond to the request of the NHDES and subsequently requested
reimbursement from the state UST trust fund. The NHDES advised Fleet that it would
first have to install a vent alarm system before it could be eligible for reimbursement. The
plaintiffs said that Fleet never informed them about the communications with the
NHDES, and that they only found about the contamination from newspaper accounts four
years later discussing the contamination at the upgradient site. The jury found that Fleet
had engaged in intentional fraud, and that it had engaged in wanton, malicious or
oppressive conduct.
In Boyle v. Boston Foundation, Inc.82, a bank that failed to disclose to purchasers of
contaminated property the existence of notice from a state agency ordering a cleanup at
the site was not held liable for misrepresentation because of a doctrine unique to the
failed financial institutions taken over by the FDIC. The agency was acting as a receiver
for the failed bank. The failure to disclose material information was held to constitute an
“agreement” under the D’Oench doctrine and since this was an unwritten agreement, the
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plaintiffs could not prevail against the FDIC. It is likely that the plaintiff would have
prevailed had the bank not been in receivership.
Many banks maintain a list of approved environmental consultants that may be used by
the bank employees when deciding who to hire to perform environmental due diligence.
When a prospective borrower is allowed to perform the environmental site assessment,
the prospective borrower may ask the prospective lender to recommend a consultant. The
dangers involved in recommending environmental consultants were illustrated in Lippy v.
Society National Bank.83 In that case, the plaintiff planned to purchase a property on
which stood an abandoned gasoline station. The plaintiff was concerned about
environmental issues but did not know either how to evaluate the environmental
conditions of the property or that his partners did not want to get involved with such a
site. However, the new business officer of the defendant bank told the plaintiff that he
could “solve his problem” and recommended an environmental consultant. The
consultant apparently had been used by the bank only to conduct asbestos surveys and
was not familiar with gasoline stations. Nevertheless, the consultant concluded that the
site did not have any environmental problems or possible violations. After the deal was
consummated, the plaintiff discovered that USTs were still buried at the site and
extensive remediation was required. The plaintiff sought reimbursement from the
defendant on the grounds that it negligently recommended the consultant. The defendant
bank claimed it was only providing business advice and owed no special duty to the
plaintiff. The trial court handed down a directed verdict in favor of the bank but the
appellate court reversed, holding that the bank owed a fiduciary duty to the plaintiff.
In Chase Lincoln Bank v. Kesseling-Dixon,84 a bank unsuccessfully sought to undo a
judgment of foreclosure on property that turned out to be contaminated with hazardous
substances. After obtaining the judgment of foreclosure and sale, the plaintiff bank did
not immediately proceed to foreclosure. Instead, the bank conducted an environmental
audit which revealed that the soil was contaminated with gasoline and its constituent
elements. Arguing that the contamination was a material change in the circumstances
under which the judgment had been granted, the bank moved to vacate the earlier
judgment 15 months after it was granted and sought to recover the debt from the
borrower’s principals. The court found that the bank should have been aware from the
chain of title that the property had been previously used by Texaco Oil Company and that
a site inspection would have put the bank on notice of the potential contamination. Since
the bank had failed to examine the property prior to electing to pursue the foreclosure
remedy and the borrower had not deceived the bank, the court refused to grant the relief
sought by the bank The obvious lesson to learn from this case is that a lender should
perform environmental due diligence prior to exercising any of its rights.
Gainer Bank v. Bongi Cartage, Inc.,85 discussed the extent that a bank must cooperate
with a borrower in cleaning up contaminated property. In this case, the defendant
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defaulted on its loan and the plaintiff sought to foreclose on the property. Prior to the
foreclosure proceeding, the defendant had negotiated a deal with a private environmental
organization which agreed to purchase the property that contained wetlands for a nominal
fee in exchange for agreeing to remediate contamination on the site. To allow this deal to
proceed, the bank had to relinquish its lien. The court ruled that the plaintiff was not
required to release its lien even if this would prevent a cleanup because the
defendant/borrower was in default of its loan.
Gaining access to a site to perform an environmental audit can be a problem at times,
especially when a borrower has defaulted and relations between the bank and its
borrower are strained. In Resolution Trust Corp. v. Polmar Realty, Inc.86 a federal district
court ruled that because of the importance of environmental due diligence, a lending
institution could obtain injunctive relief ordering a borrower to provide access to the site
to enable the lender to perform a Phase II environmental audit. While the court found that
the plaintiff would suffer irreparable harm if it was not allowed to investigate the site, the
key factor was that the mortgage provided the lender with right of entry and immediate
possession of the property. The borrower argued that the right of entry was a standard
provision that was not meant to allow a lender to perform the kind of broad ranging
inspection sought by the lender and that the testing would be extremely disruptive to its
business. The court found that the purpose of the mortgage provision was to give the
lender the physical control of the property and that a Phase II audit fell within that broad
authority. However, the court imposed conditions on the lender to make sure that the audit
limited disruption of the borrower’s business as much as possible, that the test be done
carefully and in accordance with law, and that the lender provide insurance against
damage resulting from the testing. Based on the holding in this case, lenders would be
well-advised to review their loan documents to assure that there are provisions that
provide them with a right of entry. It may also be advisable to specifically allow for the
performance of environmental audits.
In Norwest Financial Leasing v. Morgan Whitney87 the plaintiff who was the assignee of
a promissory note that was secured by a mortgage sought to rescind the sale of property
that was found to be contaminated after the sale. The plaintiff also sought to recover
economic damages against the vendor for cleanup costs, the loss of future income and
diminution of the value of its collateral. While the court found that the plaintiff had no
standing to rescind the sale the state version of CERCLA did permit recovery of
economic damages resulting from the contamination.
Can a bank be liable to a borrower when the real estate appraisal fails to discover
environmental contamination? In Seats v. Hoover,88 a Pennsylvania state court allows a
purchaser of contaminated land to maintain a claim for negligent misrepresentation
against the bank when the bank failed to advise the plaintiff that real estate appraisal did
not address environmental conditions. In this case, the plaintiff’s purchase agreement
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contained a contingency clause for environmental hazards. The loan application materials
provided by the bank contained a statement that when the bank obtained information
about environmental conditions from a broker, appraiser, seller or other party to a loan
transaction, the information would be provided to the borrower. The statement also
indicated that the bank would comply with any state or local reporting requirements. The
bank retained an appraiser but did not provide the appraiser with a copy of the contract
with the environmental contingency clause. The appraisal did not observe any adverse
conditions. However, the appraiser’s report contained a attachment which indicated that
the appraiser did not have any information about hidden or unapparent conditions
including the presence of hazardous or toxic substances and that because it was not an
environmental expert, the report could not be considered an environmental assessment of
the property. The bank approved the loan but did not provide the borrower with a copy of
the disclaimer attachment. After the plaintiff began construction of her house and a
drinking water well, she learned that the groundwater beneath her property was
contaminated from an adjacent landfill. The plaintiff then sued the bank claiming she had
relied on the appraiser’s conclusion that there were no environmental hazards. On the
claim that the bank negligently inspected the property, the court said the bank owed no
duty to inspect the property. However, on the negligent misrepresentation claim, the court
said there was a genuine issue of material facts and denied the bank’s motion for
summary judgment. The court said that to bring a negligent misrepresentation claim, a
plaintiff must establish that there was a misrepresentation of a material fact, that the
defendant knew or should have known about the misrepresentation, the misrepresentation
was made to induce the plaintiff, the plaintiff justifiably relied on the misrepresentation
and the injury resulted from the misrepresentation. The court said that there was a
material question whether the bank should have known that the appraiser’s report might
be erroneous and that the bank may have given the appraisal to the plaintiff without the
attachment as an inducement to close the loan.
Lenders who do not require a borrower to perform environmental due diligence prior to
acquiring a property that will be used as collateral for a loan or who rely on
environmental insurance policies in lieu of requiring borrowers to perform due diligence
should consider providing borrowers with a written disclosure that the waiver of the
environmental due diligence requirement or the purchase of an environmental insurance
policy does not constitute a finding by the bank that there are no environmental concerns
associated with the property. Otherwise, some unsophisticated borrowers who end up
facing substantial cleanup costs may argue that they were led to believe by their bank that
there were no serious environmental problems associated with the property. In Mattingly
v. First Bank of Lincoln,189 the Montana Supreme Court reversed a summary judgment
ruling in favor of a bank and allowed the borrower to proceed with negligent
misrepresentation and constructive fraud claims against its former lender because there
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was a question of material fact whether the bank had created a false impression about the
environmental conditions of the property.
Many states have statutes that require owners of property to disclose existence of
contamination to prospective purchasers. While these laws do not generally apply to
agents of the sellers, they can be liable under certain circumstances for fraudulent or
negligent misrepresentation. For example, in Ramsden v. Farm Credit Services90, the
Wisconsin Court of Appeals allowed a claim for misrepresentation to proceed against
auctioneer of contaminated farmland. In that case, the plaintiffs were the high bidder on a
dairy farm sold at public auction. The prior owners of the farm had complained to their
lender, Agribank, that their cattle were sick and dying. After the prior owners defaulted,
Agribank took title and learned that an underground storage tank containing gasoline had
been leaking. Tom Hass who was an employee of Agribank notified the state
environmental agency who, in turn, ordered Agribank to remove the tank and remediate
the contamination. Agribank removed the tank but did not address the soil or
groundwater contamination. Hass conducted the auction for Agribank. During the
auction, he told the plaintiffs that Agribank was responsible for the remediating any
contamination, that the land was suitable for use as a farm and that there was plenty of
clean water available for the cattle. He did not mention that the groundwater was
contaminated or that cattle had died. Soon after purchasing the farm, the plaintiffs lost
186 cows and the one of the plaintiffs became sick. The plaintiffs took water samples to a
local university which determined that the water was contaminated with benzene and that
the cows had died from benzene poisoning. In reversing the dismissal of the complaint
by a trial court, the Court of Appeals said that while an agent did not have an initial duty
to disclose knowledge of the property to the plaintiffs because such a disclosure would
have been contrary to the interests of its principal, once the agent did make factual
statements he had a duty to make truthful statements. Once the agent has chosen to speak,
the court said the agent may not omit material facts relevant to the condition of the
property that the agent has talked about and which omissions would foreseeably influence
the potential purchaser’s decision to purchase.
VI. CERCLA LIENS
CERCLA authorizes EPA to impose two kinds of liens to recover response costs incurred
on a contaminated Property.
A. Non-Priority Lien
Prior to the 2002 Brownfield Amendments, EPA was authorized to impose a non-priority
lien on property for the full amount of response costs that it has incurred at a site and for
damage to natural resources against the property of the PRP that is subject to the cleanup
(the “CERCLA Non-Priority Lien”).91 The lien applies to all of the property owned by
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the PRP and not just the portion of the site affected by the cleanup. However, the lien is
subject to the rights of bona fide purchasers and previously perfected interests in the
property so it does not act as a “superlien”. 92
The lien becomes effective when EPA incurs response costs or notifies the property
owner of its potential liability whichever is later, whichever date is later. Although the
lien was enacted as part of the 1986 Superfund Amendments and Reauthorization Act
(SARA) to CERCLA, it applies to costs incurred prior to the passage of SARA. The lien
continues until the PRP resolves its liability or it becomes unenforceable though
operation of the CERCLA statute of limitations.93
EPA has issued guidance to its regional offices describing the circumstances and procedures
to follow for perfect non-priority liens94. The guidance indicates that EPA should perfect its
lien when the property is the chief or substantial asset of a PRP, has substantial monetary
value, the PRP will likely file for bankruptcy, the value of the property will significantly
increase as a result of the cleanup or the PRP plans to sell the property. If the cleanup costs
equal or exceed the value of the property, EPA will not normally file a notice of the lien
unless it appears that a secured creditor may foreclose on the property and is not eligible for
the secured creditor exemption. The guidance also states that EPA should not file a notice of
a lien where it appears that the defendant satisfies the innocent purchaser defense.95
The ability of a property owner to challenge the imposition of the CERCLA lien is
extremely limited. Initially, a number of courts ruled that the CERCLA ban on pre
enforcement review96 did not deprive the federal judiciary of its jurisdiction to hear
challenges to the federal lien.97 In 1991, the United States Court of Appeals for the First
Circuit ruled that EPA must provide minimum procedural safeguards to property owners
whose property may be subject to a CERCLA lien.98
In response, EPA issued revised lien guidance in 1993 to comply with Reardon.99 The
guidance provides that EPA should send a notice by certified mail advising the property
owner of the agency’s intent to perfect its lien, the facts supporting EPA’s belief that it may
file a lien and informing the owner that it may submit documentation to EPA explaining
why a lien should not be perfected or request a informal hearing before an administrative
law judge to determine if EPA has a reasonable basis to believe that the statutory criteria for
perfecting a lien exist. The guidance also provides that EPA may, under exceptional
circumstances, perfect a lien prior to providing the owner with an opportunity to be heard
provided the agency sends a post-perfection notice to the owner immediately upon
perfection.100
The 1993 Lien Guidance sets forth the factors that a regional judicial officer should consider
when determining if EPA has a reasonable basis to believe that the statutory criteria for
perfecting a lien exist. These factors include whether the property owner was sent notice of
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the potential lien by certified mail, the property is owned by a PRP, the property was subject
to a response action, EPA incurred response costs and any other information that shows that
the lien should not be filed.101 Because the informal hearing is limited to whether EPA had a
reasonable basis to perfect a lien, the recommendation of the hearing officer does not bar
EPA or the property owner from raising any claims or defenses in later proceedings nor does
the recommendation have any binding effect on the ultimate liability of the property
owner.102 Because of the relatively low burden that EPA has to satisfy, the vast majority of
informal hearings have upheld EPA’s determination that it may impose a lien on the
property.103 Proposed liens have been upheld where EPA has not identified other PRPs who
contributed to the contamination.104 EPA has not been required to file a cost recovery action
prior to perfecting a CERCLA non-priority lien and has been allowed to perfect a lien even
where a cost recovery proceeding is pending.105
There has been only reported instance where an informal hearing did not uphold EPA’s
proposed lien. 106 In that case, EPA sought to impose a lien on all parcels where the PRP had
conducted operations. However, the hearing officer concluded that EPA had not conducted
removal actions on 22 acres but upheld perfection of the lien on the other 61 acres.
B. Windfall Lien
The 2002 Brownfield Amendments added a second lien provision to make sure that a
BFPP does not become unjustly enriched at the taxpayers’ expense. Section 107(r) of
CERCLA authorizes EPA to impose a windfall lien on property owned by a BFPP under
certain circumstances. 107 To perfect a windfall lien, EPA must establish that it has
performed a response action, has not recovered its response costs and that the response
action increased the fair market value of the property above the fair market value of the
facility that existed before the response action was initiated.
The windfall lien will arise at the time EPA incurs its costs but will not be effective until
EPA perfects the lien by filing it in the local land records. The windfall lien shall
continue until it is satisfied by sale or other means, or EPA recovers all of its response
costs incurred at the property.
The windfall lien will be capped by the amount of unrecovered response costs and will
not exceed the increase in fair market value of the property attributable to the response
action at the time of a sale or other disposition of the property. This is in contrast to the
CERCLA non-priority lien where EPA may file a lien for all of its response costs for a
particular site.
The possibility of a windfall can inject uncertainty into a real estate transaction. For
example, EPA is not required to notify a property owner when it incurs costs that may be
eligible for a windfall lien. Instead, the windfall lien becomes effective when EPA incurs
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costs. Since the windfall lien provision has no statute of limitations, the parties may not
know the extent of EPA’s past response costs. In addition, the parties may not know how
much of the current property value EPA may attribute to its response action. Moreover, a
purchaser may not know if it qualifies as a BFPP at the time of the closing and, therefore,
may not know if is potentially vulnerable to a windfall lien. Finally, a party may
inadvertently fail to maintain its status as a BFPP after taking title, thereby nullifying the
windfall lien.
In July 2003, EPA issued its interim windfall lien guidance clarifying when the agency
plans to exercise its authority to impose a windfall lien and how it plans to calculate the
amount of the windfall lien (the “Windfall Lien Guidance”).108
The Windfall Lien Guidance provides indicates that the decision to perfect a windfall lien
will be based on site-specific factors but does provide examples of factors that could
influence EPA’s exercise of its enforcement discretion. However, unlike the guidance for
the CERCLA Non-Priority Lien, the Windfall Lien Guidance does not discuss how or if
the agency intends to notify a BFPP of the existence of a potential Windfall Lien.
To qualify as a BFPP, a party may not have a “financial relationship” with the seller or a
liable party. The Windfall Lien Guidance does not shed any light or provide a mechanism
for allowing a purchaser to determine if it would be a BFPP who might be potentially
subject to a windfall lien. For example, if the seller or one of the liable parties for the site
is a publicly traded company and the purchaser owns a non-controlling interest in that
entity, does this “financial relationship” disqualify it as a BFPP?
On the other hand, there may be instances when a prospective purchaser may want to
forgo its status as a BFPP and either accept the risk that it will be a CERCLA liable party
or negotiate some other risk transfer mechanism such as insurance. However, the
Windfall Lien Guidance does not provide a mechanism for a purchaser to disqualify itself
as a BFPP short of deliberately failing to comply with its Continuing Obligations.
Perfecting the Windfall Lien
In general, EPA will not perfect a windfall lien if all of the increase in the fair market
value (“FMV”) of the property was due to a response action performed by EPA prior to
purchase by the BFPP. 109 EPA will also generally not perfect a windfall lien when the
BFPP acquired the property at FMV after the cleanup since there would not be any
windfall to the BFPP.110 If the remedy was constructed prior to acquisition but some
response actions must continue after the closing such as operation and maintenance
activities, EPA will not generally perfect a windfall lien for those activities since they
would not likely have any impact on the FMV of the property. 111 EPA will also not seek
a windfall lien when there is a substantial likelihood that it will recover all of its costs
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from liable parties such as when it has entered into a consent decree or settlement
agreement with the liable party.112
The agency will also decline to perfect a windfall lien if it has previously filed a
CERCLA Non-Priority Lien and has entered into a settlement with a prior owner to
satisfy that lien.113 EPA expects a BFPP acquiring a property subject to a CERCLA NonPriority Lien would normally be resolved as part of the real estate transaction either with
a settlement with the agency or a reduced purchase price to reflect the value of the
CERCLA Non-Priority Lien. If the CERCLA non-priority lien is not resolved at the
closing, EPA indicated that it would probably pursue cost recovery after the closing or
commence an in rem action against the property.114
However, the guidance cautioned that there might be instances where EPA may seek to
perfect a windfall lien even when the increase in FMV occurred prior to the BFPP
acquisition. Factors that could cause the agency to perfect a windfall lien under such
circumstances include where it has substantial unreimbursed costs, when EPA’s cleanup
action resulted in a significant increase in the property’s fair market value, there are no
viable and liable parties from whom the agency could recover costs, and the response
action occurred while a non-liable party owned the property. One such example would be
if a lender qualifying for the secured creditor exemption foreclosed on contaminated
property while EPA performed a response action that substantially increased the
property’s FMV. Under such circumstances, EPA indicated it might file a windfall lien,
particularly if the lender received sales proceeds that exceeded the value of its security
interest.115
EPA warned that it might seek to perfect a windfall lien if a party attempted to complete
a transaction or series of transaction to avoid CERCLA liability. The Windfall Lien
Guidance indicates that EP will pay particular attention to transactions that appear to
provide a windfall to a BFPP, or appear to be structured to allow a limit EPA’s ability to
recover its costs against the seller (e.g., disposing valuable assets so that the seller no
longer has funds to pay EPA or conveying property to evade perfection of a lien). If the
BFPP did acquire the property below the FMV, EPA may seek any of the windfall
attributable to its response actions.116 For example, EPA expends $3 million on a site and
the cleanup increases the FMV from $1 million to $2 million. A BFPP then acquires the
land for $500K and EPA then spends an additional $1 million, which increases the FMV
to $2.5 million. Because the BFPP acquired the property below the FMV, EPA would
seek the $1.5 million increase in FMV.117
The Windfall Lien Guidance also identifies two kinds of expenditures which EPA will
generally not perfect a windfall lien even if they result in an increase in FMV. EPA will
not perfect a windfall lien for the amount of any brownfield grant or loans awarded for
the site.118 In addition, the agency will not seek a windfall lien when its only costs are for
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performing a preliminary site assessment or site investigation, and EPA does not
anticipate performing any removal or remedial actions.119
The agency also indicated that it would not seek to perfect a windfall lien when the BFPP
acquires the property for two types of uses. The first excluded use is when the BFPP
plans to use the property for residential purposes provided that the seller and he BFPP are
non-governmental and non-commercial entities (i.e., homeowner-to-homeowner sales.120
The second excluded use is when the BFPP acquires the property to create or preserve a
public park, greenspace, recreational or similar public purpose. However, if the public
use is only temporary and then converted to a different use, EPA may consider perfecting
a windfall lien.121
EPA may also decline to perfect a windfall lien when prior enforcement discretion
policies might apply to the BFPP. For example, EPA indicated that it would not generally
perfect a windfall lien against a BFPP that acquires property that would otherwise qualify
for the Residential Property Owner Policy. This policy applies to property with a
contaminated aquifer from an off-site source122 or where the seller has previously been
issued a comfort letter from EPA.123
The Windfall Lien Guidance does not indicate if a statute of limitations applies to the
windfall lien. However, EPA personnel have said in conferences moderated by the author
that the agency does not intend to resurrect all of its “old and cold” costs but only recoup
those costs that result in a windfall for the BFPP.
Calculating The Windfall Lien
EPA will generally only seek the increase in FMV attributable to a response action that
occurs after a BFPP acquires the property at FMV. The Windfall Lien Guidance states
that if a CERCLA Non-Priority Lien or a windfall lien has not been filed against the
property, BFPPs should be able to take title with the understanding that EPA will only
seek the increase in FMV if the agency subsequently performs a response action.
However, EPA emphasized that if it is required to enforce its windfall lien through
litigation, the agency may seek all of its costs and not just those attributable to the
increased FMV.124
Unfortunately, the Windfall Lien Guidance does not shed much light on how the FMV
should be calculated. Instead, EPA simply states that it will compare the FMV of the site
in a clean condition to the FMV when the property was purchased. There are a number of
ways to calculate FMV but the Windfall Lien Guidance does not indicate what approach
EPA plans to use. In addition, the Windfall Lien Guidance does not explain how the
agency plans to distinguish between FMV attributable to a response action or due to
market conditions from neighborhood redevelopment projects. Often times, the mere
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creation of a redevelopment plan for a formerly blighted area can result in increased
property values. In a recent conference call moderated by the author, EPA representatives
said that EPA does not have any formula that it will use nor does it plan to issue any
guidance on the form or content of appraisals that are to be used for determining FMV.
Instead, the agency will rely on case law, carefully review appraisals and take a close
look at what factors are affecting property valuations.
If the BFPP believes there is a potentially significant windfall resulting from a postacquisition EPA-funded cleanup, the agency recommends that the BFPP obtain a reliable
estimate of the property’s FMV in its remediated condition. The estimate should be based
on a real estate appraisal by a trained professional though EPA suggested that other
credible mechanisms for determining the FMV in its clean condition might be appropriate
such as a tax appraisal or information from neutral professional real estate brokers.
The Windfall Lien Guidance also does discuss if EPA plans to establish any procedures
for contesting FMV estimates. In a recent conference call moderated by the author, EPA
representatives said that EPA would try to resolve these disputes through negotiation. If
FMV disputes cannot be resolved, the agency would likely send a referral to the United
States Department of Justice to file a declaratory relief action to determine the FMV.
Resolving Windfall Liens
EPA hopes the Windfall Lien Guidance will limit the need for the agency to become
involved in private real estate transactions. However, the agency acknowledged
recognized there might be site-specific circumstances that will require some assurance
regional offices. EPA anticipates that this could be accomplished by issuance of comfort
letters under EPA’s comfort/status letter policy.125 However, the Windfall Lien Guidance
suggested that the use of such letters should be limited to situations for projects found to
be in the public interest or where there is no other mechanism to adequately address the
concerns of the party requesting the assurances from EPA.
For situations where EPA is likely to perfect a windfall lien, EPA and USDOJ have
developed a model settlement agreement to facilitate resolution of windfall liens. The
model agreement provides that the federal government will release and waive a windfall
lien in exchange for payment of cash or other appropriate consideration such as
performance of additional response actions. The agreement will require the BFPP to
provide EPA with an irrevocable right of access and ensure that any tenants or subtenants
provide such access, file a notice of the agreement in the land records and provide a copy
to any tenants or subtenants, require the BFPP and any successors to comply with any
land use restrictions or engineering controls, and requires the BFPP to take all steps
necessary for it to maintain its status as a BFPP. Interestingly, the windfall lien model
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agreement does not contain a covenant not to sue (“CNTS”) which typically appears in a
PPA.
While EPA has indicated that it will generally not enter into PPAs, there have been
instances where the agency has agreed to issue PPAs for sites with significant public
interest. Because of the absence of CNTS in the windfall lien model agreement, BFPPs of
sites where redevelopment is a high priority to local governments should explore the
possibility of using a PPA as the mechanism for removing or eliminating a potential
windfall lien. In such circumstances, it would be advisable to have local government
contact EPA about the need of a PPA. EPA should also be advised if the key lender for
the redevelopment is insisting on a CNTS.
In lieu of EPA imposing a windfall lien on the property, EPA is also authorized to accept
a lien on any other property that the BFPP owns or provide some other assurance of
payment in the amount of the unrecovered response costs that is satisfactory to EPA.
VII. STATE SUPERLIEN LAWS
Nearly two-dozen states have non-priority environmental lien laws that operate in the
same manner as general commercial liens.126 The cleanup costs incurred by
environmental agencies in those states take precedence over all other claims except
previously perfected security interests.
In addition, approximately 8 states have enacted so-called “Superlien” provisions within
their mini-Superfund laws.127 These laws, initially adopted to ensure that states could
recover the costs of publicly financed cleanups of hazardous waste sites, grant a firstpriority lien on various assets of PRPs equal to the amount of cleanup expenditures
incurred by the state that is superior to previously perfected mortgages or security
interests.
The Superliens not only subordinate the rights of lenders with previously perfected
security interests, but also subordinate the rights of a bona fide purchaser who bought
property without notice of the contamination or who acquired title through abandonment,
foreclosure, deed in lieu of foreclosure, or bankruptcy order. In addition, these laws can
jeopardize the solvency of de minimis PRPs whose limited assets may be attached despite
their tenuous connection to a hazardous waste site.
Interestingly, only a limited number of liens have actually been filed. Instead, states are
prospectively wielding these laws like a sword of Damocles over the assets of the PRPs
in order to extract concessions for privately financed settlements. Nevertheless, it is
extremely important that corporate managers, lenders and their counsel be aware of the
requirements of these laws and the risks they represent.
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The “Superlien” laws vary considerably from state to state. Some of the Superlien
statutes merely impose a priority lien on the property which is subject to the cleanup
while others attach to all of the assets of the responsible party, including personal
property and business revenues located or derived from within the state.
While some Superliens only become effective after the lien has been recorded, several
states permit a “secret” Superlien, which attaches to the property before public notice of
the lien is filed. These are particularly onerous provisions because a prudent lender who
diligently searches the public records may nevertheless find its interest subordinated by
the “hidden” Superlien. Finally, some states permit the Superlien to apply retroactively
and prevail over security interests that were perfected before the Superlien law was
enacted.
VIII. LEGACY RISK
Financial institutions are also facing increased potential for environmental risk from
loans or properties acquired during bank mergers or acquisitions. Banks that did do not
perform thorough environmental due diligence during these consolidations have found
themselves saddled with environmental liability. Following are two recent examples.
EPA recently added the Swan Cleaners/Sun Cleaners Area Ground Water Plume site in
Wall Township, New Jersey to the NPL. Two dry cleaners had formerly operated at the
site which is currently a bank branch office owned by Bank of America. The dry cleaners
discharged Tetrachloroethylene (PCE) into the on-site septic system where it eventually
migrated into the groundwater that serves public and private drinking water wells within
a four-mile radius. PCE was detected at concentrations of up to 200 parts per million
(ppm) in the groundwater. The PCE-contaminated groundwater may also be impacting
surface water groundwater. In addition, following indoor air sampling of 300 residential
and commercial properties in 2001, EPA has had to install ventilation systems in the
basements of nine homes and one ventilation system on a commercial property. This
property was acquired by Summit Bank when it purchased the property. Fleet Bank then
took title to the property when it acquired Summit Bank. Fleet then merged with BOA.
Apparently, neither bank appeared to perform the kind of environmental due diligence
that they customarily expect from their borrowers.
A major money center bank recently received a demand letter from the New Jersey
Department of Environmental Protection (NJDEP) for reimbursement of $598K in past
cleanup costs and $5.7M in natural resources damages. The NJDEP had alleged that the
bank was strictly liable under the state Spill Compensation and Control Act (Spill Act)
because a predecessor had held title to the contaminated property from October 1975 to
July 1977. In this case, a finance company (Finance Company) extended a loan to a
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former dry cleaner in 1974 that was secured by, inter alia, a second mortgage on the
property. After the borrower defaulted on its loan, the holder of the first mortgage
commenced a foreclosure action. The Finance Company purchased the property at the
foreclosure sale for $57.3K. After holding title for 18 months, the Finance Company sold
the property for $66K. In 1983, the Finance Company was acquired by another credit
company (Credit Company) and operated as a subsidiary. The major money center bank
(Bank) purchased the stock of the Credit Company in 1987. In 1986, the Ocean Township
Health Department discovered that drinking water wells in Dover Township were
impacted with Tetrachloroethylene (PCE) from the dry cleaning business. The NJDEP
imposed a well restriction area (WEA) and recommended that all impacted properties
seal their wells and connect to the municipal water supply system. Public funds were
used to extend the municipal drinking water system. NJDEP then issued a demand to the
current and former owners and operators of the property. The NJDEP alleged that the
Bank was a prior owner because it was a successor to the Finance Company. After
receiving the NJDEP demand, the Bank’s counsel advised NJDEP that the Bank should
not be liable because it fell within the Spill Act’s secured creditor exemption. The Bank’s
counsel indicated that the Finance Company foreclosed on the property to protect its
security interest, that was no evidence that the Finance Company ever participated in the
management of the dry cleaner and that selling the property within 18 months satisfied
the requirement of the Spill Act’s secured creditor exemption that a foreclosing lending
institution dispose of the property in a “reasonably expeditious” manner. The NJDEP
agreed to not to pursue the Bank in the agency’s cost recovery action.
This case illustrates two important points. First, it is important for banks to assess
potential legacy issues when contemplating a merger with another financial institution.
The liability at issue here involved a transaction that took place nearly 30 years ago.
Second, the Bank benefited from case law holding that the Spill Act’s secured creditor
exemption could be applied retroactively. The secured creditor exemption was added to
the Spill Act in 1993. Because the legislative history indicated that this was a curative
amendment, courts have interpreted the exemption to apply to the initial enactment of the
Spill Act. Thus, in determining how much diligence to conduct for legacy issues, banks
should determine when any state lender liability safe harbor became effective
1
42 U.S.C. 9601
42 U.S.C. 6901
3
15 U.S.C. 2601
4
42 U.S.C. 9607(a)(1)-(4)
5
Id. at 9604
6
Id. at 9607
7
Id. at 9606
8
Id. at 9607(a)(4)(A)-(D)
9
Id. at 9607(b)
10
Id. at 9607(b)(3)
11
Id. at 9601(35)(A)
2
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48
12
Id. at 9601(35)(B). It is this requirement to perform an appropriate inquiry that is the source of the
environmental due diligence that is now customarily performed in real estate, corporate and financial
transactions.
13
42 U.S.C. 9607(q)
14
Small Business Liability Relief and Brownfield Redevelopment Act, P.L. 107-118
15
42 U.S.C. 9607(r)
16
See House Debate on H.R. 85, 96th Cong., 1st. Sess. (1979) (Sept. 18, 1980), reprinted in 2 A Legislative
Report of the CERCLA, Senate Comm. On Environmental and Public Works, 97 th Cong., 2d Sess., 889,945
(Comm. Print 1983).
17
P.L. 101-73 (Aug. 9, 1989)
18
56 FR 28799 (June 24, 1991)
19
57 FR 18344 (April 29, 1992). This rule was vacated by the Court of Appeals for the District of
Columbia in 1994 in Kelly v. EPA ,15 F.3d 1101 (D.C. Cir. 1994 ). On December 11, 1995, EPA and the
Department of Justice announced that they would enforce the provisions of the 1992 CERCLA Lender
Liable rule that had been invalidated by the DC Circuit (60 FR 63517, December 11, 1995).
20
Omnibus Consolidated Appropriations Act of 1997, P.L. 104-208 §§ 2501-2505, 110 Stat. 3009 (Sept.
30, 1996)
21
42 U.S.C. 9607(n)(6)(B)
22
42 U.S.C. 9601(20)(E)(i)
23
A lender will not be considered a CERCLA owner or operator if it did not participate in the management
of a facility prior to foreclosure, forecloses on the facility or vessel, and then follows certain requirements.
After foreclosure, the lender may maintain business activities, wind up operations, undertake a response
action in accordance with the NCP or under the direction of an on-scene coordinator, or otherwise take any
other actions to preserve, protect or prepare the vessel or facility prior to sale or disposition provided the
lender tries to sell , re-lease or otherwise divest itself of the facility or vessel at the earliest practicable,
commercially reasonable time, and on commercially reasonable terms after taking into account market
conditions and legal or regulatory requirements. Id at. 9601(20)(E)(ii).
24
42 U.S.C. 6924(u) and (v)
25
Id. at 6938(h)
26
Id at. 6973
27
Id. at 6972(a)(1)(B)
28
42 U.S.C. 6991(b)(h)(9)
29
Id. at 6991(b)(h)(9)(B).
30
Id. at 6991(b)(h)(9)(C)
31
No. 30, 011 (Ch. Div. Rankin Cty. Miss. Mar 18, 1994)
32
These include an insured depository institution, an insured credit union, a bank or association chartered
under the Farm Credit Act, a leasing or trust company that is an affiliate of an insured depository institution
as well as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the
Federal Agricultural Mortgage Corporation, or any other entity that in a bona fide manner buys or sells
loans or interests in loans. 42 U.S.C. 9601(20)(G)(iv)(I)-(IV),(VI)
33
Id. at 9601(20)(G)(iv)
34
40 CFR 300.1100(a)
35
42 U.S.C. 9601(20)(G)(vi)
36
57 FR 18359 (April 29, 1992)
37
Id. at 18375
38
Id. at 18357
39
42 U.S.C. 9601(20)(F)
40
Id at 9601(20)(F)(ii)
41
An extension of credit includes a lease finance transaction where the lessor does not initially select the
leased vessel or facility, during the term of the lease does not control the daily operation or maintenance of
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49
the vessel or facility, or the transaction conforms with regulations issued by a federal banking agency, an
appropriate state bank supervisor or with regulations promulgated by the National Credit Union
Administration Board. Id. at 9601(20)(G)(i)
42
Id. at 9601(20)(F)(iv)
43
873 F.Supp. 51 (E.D.Mich. 1995)
44
The court also said that requiring the borrower to comply with environmental laws, agreeing to advance
the money for the UST cleanup and requiring the cleanup to comply with the environmental laws as a
condition of the Settlement Agreement did not constitute participation in the environmental aspects of the
operation.
45
893 F.Supp. 627 (N.D.Tex. 1995)
46
2004 WL 1103023 (D.Or. 2004)
47
Id. at 9601(20)(G)(ii). An "Operational function" is defined as functions performed by a facility or plant
manager, operations manager, chief operating officer or chief executive officer. Id. at 9601(20)(G)(v)
48
56 FR 28802 (June 24, 1991)
49
Id.
50
Id.
51
57 FR. 18354 (April 29, 1992)
52Id.
53
The CERCLA Lender Liability Rule had required lenders to take actions consistent with the NCP, such as
removing abandoned drums at a facility they have foreclosed upon, in order to preserve their immunity..
Abandonment of drums or equipment would not be consistent with the requirements of the NCP and could
cause a lender to lose its immunity even where it has complied with all of the aspects of the CERCLA
Lender Liability Rule. However, the Lender Liability Amendments did not expressly address this issue of
post-foreclosure NCP compliance.
54
183 F.3d 1269 (11th Cir. 1999)
55
The district court subsequently determined that that the bank had not been negligent, 174 F.Supp. 2d
1360 (M.D. Ga. 2001)
56
U.S. v. Lamb, Kemp Industries v. Safety Light Corp., 857 F.Supp. 373 (D.N.J. 1994)
57
Stearns & Foster Bedding Company v. Franklin Holding Corp. et al, 947 F.Supp. 790,802 (D.N.J. 1996);
U.S. v. Wallace, 893 F.Supp. 627 (N.D.Tex. 1995)
58
Compare U.S. v. Maryland Bank & Trust Co., 632 F.Supp. 573 (D.Md. 1986)(bank holding title for four
years was not entitled to the secured creditor exemption) with U.S. v. Mirabile, 15 Envtl. L. Rep. 20994
(E.D.Pa. 1985)
59
Northeast Doran, Inc v. Key Bank of Maine, 15 F.3d 1 (1 st Cir. 1994); U.S. v. McLamb, 5 F.3d 69 (4 th
Cir. 1993)
60
See In re Bergsoe Metals Corp, 910 F.2d 668 (9 th Cir. 1990). This view was also endorsed by the
legislative history. See H.R. Rep No.1016, 96th Cong.2d Sess., P.L. 96-510, reprinted in 1980 U.S. Code
Cong & Admin. News 6119,6181.
61
947 F.Supp. 790 (D.N.J. 1996)
62
Franklin and M& T each provided the company with $350,000 while Rand provided $150,000.
63
947 F.Supp. at 807
64
Id.
65
Id.
66
In a footnote, the court said the 1996 Lender Liability Amendments lent some support to the contentions
of M & T and Rand but was not critical to the court's analysis since the plaintiff had chosen to base its
summary judgment motion on the alleged "operator" liability of those two entities. Id. at 802-03n.6
67
194 B.R. 354 (Bkrtcy.E.D.Pa. 1996)
68
237 F. Supp. 2d 618 (D.Md. 2002). See related case In re: William Hurley et al, 285 B.R. 871 (Bankr.
D.N.J. 2002)
69
Parties to the PSA were First Union, First Union National Bank, CRIIMI MAE Services Limited
49
50
Partnership ("CMSLP"), LaSalle Bank and ABN AMBRO Bank, N.V. ("AMBRO Bank"). Plaintiff LaSalle
Bank serves as the Trustee of the trust in question. Under the PSA, plaintiff LaSalle Bank as Trustee was
responsible for allocating cash flows generated by the loans. The mortgage loans were to be serviced and
administered by First Union National Bank as the Master Servicer and CMSLP as the Special Servicer,
with AMBRO Bank acting as the fiscal agent.
70
The representations and warranties made by Howell and Hurley in the Environmental Indemnity
Agreement included, inter alia, that there are no past or present releases of hazardous substances on the
property or past or present non-compliance with environmental laws that were not disclosed in the
environmental reports given to the lender Holliday. Howell and Hurley further represented that they had
provided to the lender Holliday any and all information relating to conditions in, on, under or from the
mortgaged property as known to them.
71
Warranty xiv provided in pertinent part: “Other than payments due but not yet 30 days or more
delinquent, (A) there is no material default, breach, violation or event of acceleration, and there is no other
material default, breach, violation or event of acceleration, existing under the related Mortgage Note or
each related Mortgage…”
72
Six separate paragraphs of this August 19 letter from Hurley’s environmental counsel discussing the
some of the environmental conditions of the property were eliminated in the August 20 version of that letter
that was sent by Hurley to Holliday in support of Howell's application for the $ 9 million mortgage loan.
73
In Warranty xxii, Lehman represented that the mortgagor of each property had covenanted to maintain
the related property in compliance with all applicable laws and that the originator had performed "the type
of due diligence in connection with the origination of such Mortgage Loan customarily performed by
prudent institutional commercial and multifamily mortgage lenders." In Warranty xlvi, Lehman represented
that, "the origination, servicing and collection practices used by [Lehman] or any prior holder of the
Mortgage Note have been in all respects legal, proper and prudent and have met customary industry
standards."
74
Lehman contend argued that the PSA granted CMSLP the exclusive right to bring suit when a loan is
referred to it for special servicing and that LaSalle Bank was not authorized to prosecute claims relating to
loans which have been referred for special servicing to CMSLP. However, the court ruled that the provision
allowing CMSLP the right to institute a suit in its capacity as Special Servicer did not negate the rights of
LaSalle Bank.
75
The damages consisted of the principal amount of the loan ($ 8,285,851.57), plus ordinary interest ($
1,884,400.59), plus default interest ($ 899,475.22), plus servicing advances ($ 798,134.48), and minus
sums already collected by LaSalle Bank during the bankruptcy proceeding ($ 370,000.00).
76
OAL DKT No. ESF 611-97 (November 26, 1997)
77
02 Civ. 2166 (S.D.N.Y. July 13, 2004)
78712 A.2d 33, 122 Md. App. 96 (Ct. Sp. App. June 24, 1998)
79
480 N.W.2d 854 (Iowa 1992).
80
522 N.W.2d 542 (Wis. Ct. App. 1994)
81
No. 99-6196 (May 6, 2004)
82
788 F. Supp. 627 (D. Mass. 1992)
83
623 N.E.2d 108 (Ohio Ct. App. 1993).
84
554 N.Y.S.2d 379 (Sup. Ct. 1990
85.577 N.E.2d 992 (Ind. App. 1991).
86.780 F.Supp. 177 (S.D. N.Y. 1991).
87.787 F.Supp. 895 (D. Minn. 1992).
88No. 96-3244, 1999 U.S. Dist. LEXIS 13379 (August 18, 1999)
89
No. 96-678, 1997 WL 668215 (Sup. Ct. Montana, Oct. 28, 1997)
90No. 97-2769 (Ct. App. 12/23/98)
91
42 U.S.C. 9607(l).
92
42 U.S.C. 9607(l)(3).
50
51
93
42 U.S.C. 9607(l)(2)
For EPA guidance on the CERCLA Non-Priority Lien, see “Guidance on Federal Superfund Liens”,
Memorandum from Thomas L. Adams, Jr., Asst. Administrator, Office of Enforcement and Compliance
Monitoring (Sept 22, 1987)(hereinafter “1987 Lien Guidance”); “Supplemental Guidance on Federal
Superfund Liens”, Memorandum from William A. White, Enforcement Counsel, Office of
Enforcement/Superfund, and Bruce M. Diamond, Director, Office of Waste Programs Enforcement (July
29, 1993)(hereinafter “1993 Lien Guidance”).
95
1987 Lien Guidance at pages 3-4
96
42 U.S.C. 9613(h)
97
Barmet Aluminum Corp. v. Reilly, 927 F.2d 289 (6th Cir. 1991); South Macomb Disposal Authority v.
U.S., 681 F.Supp. 1244 (E.D.Mich. 1991); Juniper Development Group v. U.S., No. 89-375 (D.Ariz. April
26,1990).
98
Reardon v. United States, 947 F.2d 1509 (1st Cir. 1991).
99
At least one federal court has upheld the lien perfection procedures established in the 1993 Lien
Guidance as satisfying the Due Process Clause of the Fifth Amendment and do not amount to an
unconstitutional taking of a substantial property interest. U.S. v. 150 Acres of Land, More or Less, 3
F.Supp. 2d 823 (N.D. Ohio 1997)
100
The guidance contains a non-exclusive list of “exceptional circumstances such as imminent bankruptcy
of the owner, imminent transfer of all or part of the property, imminent perfection of a secured interest that
would subordinate EPA’s lien or an indication that these events are about to take place. 1993 Lien
Guidance at pages 5-6
101
1993 Lien Guidance at page 7.
102
1993 Lien Guidance at page 9.
103
In the Matter of Herculaneum Lead Smelter Site, CERCLA Lien Recommended (Region VII, February
12, 2003); In the Matter of Mercury Refining Superfund Site, CERCLA Lien Recommended (Region 2,
June 11, 2002); In the Matter of Scorpio Recycling Site, CERCLA Lien Recommended (Region 2, July 2,
2002); In the Matter of Prestige Chemical Site, CERCLA Lien Recommended (Region 4, March 26, 2002);
In the Matter of Exact Anodizing Superfund Site, CERCLA Lien Recommended (Region 2, February 14,
2002); In the Matter of Quantum Realty Company, L.C.-Hudson Refining Superfund Site, CERCLA Lien
Recommended (Region 6, October 3, 2001); In the Matter of Eastland Woolen Mill Site-Estate of Ralph A.
Berg, CERCLA Lien Recommended Decision (Region I, August 10, 2001);In the Matter of the Asbestos
Dump-Millington Site, CERCLA Lien Recommended Decision (Region 2, May 16, 2001); In the Matter of
Iron Mountain Mines, Inc., Determination of Probable Cause (Region 9, May 4, 2000); In the Matter of
Maryland Sand Gravel and Stone Company, CERCLA Lien Recommended (Region 3, June 22, 1999); In
re Bollinger Steel Site, , CERCLA Lien Recommended Decision (Region III, January 29, 1999); In the
Matter of Copley Square Plaza Site, CERCLA Lien Recommended (Region 5, June 5, 1997); In the Matter
of Avanti Site, Probable Cause Determination (Region 5, February 4, 1997); In the Matter of Paoli Rail
Yard Superfund Site, Determination of Probable Cause (Region III, November 30, 1995); In the Matter of
Bohaty Drum Site, CERCLA Lien Recommended (Region 5, June 22, 1995); In the Matter of Harbucks,
Inc.-Revere Chemical Site, Probable Cause Determination (Region III November 2, 1994); In the Matter
of CrycoChem, Inc., Probable Cause of Determination (Region III, November 29, 1993); In the Matter of
the Harvey and Knotts Drum Site, Probable Cause Determination ( Region III, November 10, 1991); In the
Matter of Picollo Farm Superfund Site, CERCLA Lien Recommended Decision (Region 1, August 27,
1991)
104
In the Matter of Picollo Farm Superfund Site, CERCLA Lien Recommended Decision (Region 1,
August 27, 1991)
105
In the Matter of Iron Mountain Mines, Inc., Determination of Probable Cause (Region 9, May 4, 2000);
In the Matter of Paoli Rail Yard Superfund Site, Determination of Probable Cause (Region III, November
30, 1995);
106
In the Matter of Pacific States Steel Removal Site, CERCLA Probable Cause Determination (Region 9,
94
51
52
August 14, 1995). Other hearings have found removal actions were conducted on non-contiguous parcels
because EPA had at least performed intrusive sampling or located its removal action office on the noncontiguous parcel. As a result, EPA was allowed to perfect a lien on those other parcels. In the Matter of
Mercury Refining Superfund Site, CERCLA Lien Recommended (Region 2, June 11, 2002); In the Matter
of Maryland Sand Gravel and Stone Company, CERCLA Lien Recommended (Region 3, June 22, 1999)
107
42 U.S.C. 9607(r). Interestingly, section 107(r) does not expressly state that the windfall lien is subject
to the rights of holders of previously perfected security interests.
108
“Interim Enforcement Discretion Policy Concerning “Windfall Liens” Under Section 107(r) of
CERCLA”, Memorandum from Susan E. Bromm, Director of Site Remediation Enforcement, U.S. EPA,
July 16, 2003
109
Windfall Lien Guidance at page 4
110
Windfall Lien Guidance at page 5
111
Windfall Lien Guidance at page 5
112
Windfall Lien Guidance at page 7
113
Windfall Lien Guidance at page 11
114
Windfall Lien Guidance at page 12
115
Windfall Lien Guidance at page 4
116
Windfall Lien Guidance at page 10
117
Windfall Lien Guidance at page 9
118
Windfall Lien Guidance at page 5
119
Windfall Lien Guidance at page 6
120
Windfall Lien Guidance at page 6. EPA said this was consistent with its “Policy Towards Owners of
Residential Property at Superfund Sites”, Memorandum from Don Clay, Assistant Administrator, Office of
Solid Waste and Emergency Response, and Raymond Ludwiszewski, Acting Assistant Administrator,
Office of Enforcement (July 3, 1991)(“Residential Property Owner Policy”).
121
Windfall Lien Guidance at page 7
122
“Policy Towards Owners of Property Containing Contaminated Aquifers”, Memorandum from Bruce
M. Diamond, Director, Office of Site Remediation Enforcement (May 24, 1995)
123
Windfall Lien Guidance at page 7. EPA cautioned that the seller received a comfort letter but the agency
subsequently expended significant funds to cleanup a site after a BFPP acquired title, EPA might pursue a
windfall lien against the BFPP since the cleanup would not have been anticipated at the time the comfort
letter was issued.
124
Windfall Lien Guidance at page 8
125
“Policy on the Issuance of Comfort/Status Letters”, Memorandum from Steve A. Herman, Assistant
Administrator, Office of Enforcement and Compliance Assurance (November 8, 1996), reprinted at 62 F.R.
4,624 (Jan. 30, 1997)
126
Alaska Stat § 46.08.075; Ariz. Rev. Stat § 49-295; Ark. Stat Ann. § 8-7-417(a), 516(a); Cal. Health &
Safety Code § 25365.6(a), Cal. Water Code 13304(c)(2); Fla. Stat. § 376.308(3)(c); 415 ILCS 5/21.3; Ind.
Code § 13-7-8.7-10.7(a); Iowa Code. Ann. 455B.396; Ky. Rev. Stat. Ann. 224.01-400(23)(a); La Rev. Stat.
Ann. 30.1149.7(f); Md. Health and Environment Title 7-266(b)(5); Minn. Stat. Ann. 514.672; Montana,
M.C.A. § 75-10-720; New York, N.Y. Nav. Law. § 181-a-e; Ohio Rev. Code Ann. § 3734.20(B), 3734.22
and 3734.26; Ok. Stat. Ann. Tit. 63, § 1-1011; Ore. Rev. Stat 466.205, 465.335 and 466.835; Pa. Stat Ann.
Tit. 35,6020.509; R.I. Gen. Laws § 23.19.14-15; South Dakota, S.D. Codified Laws Ann., § 34A-12-13;
Tenn. Code Ann. 68-212-209(d); Texas Health & Safety Code Ann. § 361.194; Va. Code Ann. 10.11406(c) (repealed); Washington, RCW § 70-105B (repealed).
127
Conn. Gen. Stat. 22a-452a; La. Rev. Stat. Ann. § 30:2281; Me. Stat. Ann. tit. 38, sect. 1370, 1306-C,
1362; Mass. Ann. Laws ch. 21E, sect 13; Mich. Comp. Laws Ann. 324.20138; N.H. Rev. Stat Ann. § 147B: 10-b; N.J.S.A. 58:10-23.11f and Wis. Stat. § 144.442(9)(i).
52